Table of Contents

As filed with the Securities and Exchange Commission on October 27, 2011

Registration No. 333-175008

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 4

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Imperva, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   7372   03-0460133
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

Imperva, Inc.

3400 Bridge Parkway, Suite 200

Redwood Shores, CA 94065

(650) 345-9000

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

 

 

Shlomo Kramer

Imperva, Inc.

President & Chief Executive Officer

3400 Bridge Parkway, Suite 200

Redwood Shores, CA 94065

(650) 345-9000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

  Copies to:  
       
 

Anthony J. McCusker, Esq.

Bradley A. Bugdanowitz, Esq.

Goodwin Procter LLP

135 Commonwealth Drive

Menlo Park, CA 94025

(650) 752-3100

 

Trâm Phi, Esq.

Imperva, Inc.

Vice President & General Counsel

3400 Bridge Parkway, Suite 200

Redwood Shores, CA 94065

 

Jeffrey D. Saper, Esq.

Rezwan D. Pavri, Esq.

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, CA 94304

(650) 493-9300

 

 

 

Approximate date of commencement of proposed sale to public: as soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering.   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨

   Accelerated filer   ¨    Non-accelerated filer   x    Smaller reporting company   ¨
      (Do not check if a smaller reporting company)   

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of
securities to be registered
 

Amount

to be

registered (1)

  Proposed
maximum
aggregate offering
price per share
  Proposed
maximum
aggregate
offering price (2)
  Amount of
registration fee (3)

Common Stock, $0.0001 par value per share

  5,750,000   $16   $92,000,000   $10,655.70

 

 

(1) Includes 750,000 shares that the underwriters have the option to purchase to cover overallotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3) The registration fee is equal to the sum of (a) the product of (i) the proposed maximum aggregate offering price of $75,000,000, as previously proposed on the initial filing of this Registration Statement on June 17, 2011 and (ii) the then-current statutory rate of $116.10 per $1,000,000 ($8,707.50 was previously paid) and (b) the product of (i) the marginal increase of $17,000,000 in the proposed maximum aggregate offering price hereunder and (ii) the current statutory rate of $114.60 per $1,000,000.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated October 27, 2011.

Prospectus

5,000,000 Shares

LOGO

Imperva, Inc.

Common Stock

This is an initial public offering of shares of common stock of Imperva, Inc.

Imperva is offering 4,750,000 of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional 250,000 shares. Imperva will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $14.00 and $16.00. Imperva has applied to list the common stock on the New York Stock Exchange under the symbol “IMPV.”

See “ Risk Factors ” on page 10 to read about factors you should consider before buying shares of the common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount

   $                    $                

Proceeds, before expenses, to Imperva

   $                    $                

Proceeds, before expenses, to the selling stockholders

   $                    $                

To the extent that the underwriters sell more than 5,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 750,000 shares from Imperva at the initial public offering price less the underwriting discount.

Certain entities associated with Accel Partners, Greylock Partners, Meritech Capital Partners, U.S. Venture Partners and Venrock and Shlomo Kramer, Imperva’s President and Chief Executive Officer, each of which are existing stockholders of Imperva, have indicated an interest in purchasing up to an aggregate of approximately $15,000,000 of Imperva’s common stock in this offering at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, these existing stockholders may elect not to purchase shares in this offering or the underwriters may elect not to sell any shares in this offering to such stockholders. The underwriters will receive the same discount from any shares of our common stock purchased by such stockholders as they will from any other shares of our common stock sold to the public in this offering.

If certain of Imperva’s existing stockholders elect to purchase an aggregate of approximately $15,000,000 of Imperva’s common stock in this offering as described above, upon completion of this offering, the executive officers, directors and 5% or greater stockholders of Imperva will beneficially own, in the aggregate, approximately 67.7% of the outstanding capital stock of Imperva. If these existing stockholders do not elect to purchase shares in this offering or the underwriters elect not to sell any shares in this offering to such stockholders, then the executive officers, directors and 5% or greater stockholders of Imperva will beneficially own, in the aggregate, approximately 63.2% of the outstanding capital stock of Imperva.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2011.

 

J.P. Morgan

Deutsche Bank Securities

RBC Capital Markets

 

Lazard Capital Markets

Pacific Crest Securities

Prospectus dated                     , 2011.


Table of Contents

LOGO

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     10   

Special Note Regarding Forward-Looking Statements

     36   

Use of Proceeds

     38   

Dividend Policy

     39   

Capitalization

     40   

Dilution

     42   

Selected Consolidated Financial Data

     44   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     46   

Business

     86   

Management

     106   

Compensation

     113   

Certain Relationships and Related Person Transactions

     137   

Principal and Selling Stockholders

     142   

Description of Capital Stock

     147   

Shares Eligible for Future Sale

     152   

Material U.S. Federal Income Tax Considerations

     155   

Underwriting

     159   

Legal Matters

     164   

Experts

     164   

Where You Can Find More Information

     164   

Index to Consolidated Financial Statements

     F-1   

 

 

Dealer Prospectus Delivery Obligation

Through and including                    , 2011 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing at the end of this prospectus, before making an investment decision. Unless the context otherwise requires, we use the terms “Imperva,” “we,” “us,” the “Company” and “our” in this prospectus to refer to Imperva, Inc. and its subsidiaries.

Overview

Imperva is a pioneer and leader of a new category of data security solutions focused on providing visibility and control over high-value business data across critical systems within the data center. Our SecureSphere Data Security Suite is a broad solution designed to prioritize and mitigate risks to high-value business data, protect against hackers and malicious insiders and address and streamline regulatory compliance. SecureSphere is an integrated, modular suite, which provides database, file and web application security and secures all business data across various systems in data centers, including traditional on-premise data centers as well as private, public and hybrid cloud computing environments. We also offer on-demand, cloud-based security services which we believe provide cost-effective web application security.

We believe that organizations are facing numerous challenges in providing the visibility and control required to protect high-value business data from theft and exploitation. Enterprises must also comply with increasingly complex regulatory standards enacted to protect this business data. As organizations adopt new technologies and architectures, they increase the complexity of, and open access to, the data center; thereby exposing their business data to new vulnerabilities. We believe that these challenges are driving the need for a new protection layer positioned closely around business data and systems in the data center, and that traditional security and compliance products do not address this need.

We were founded in 2002 with the vision of protecting high-value business data within the enterprise. As of September 30, 2011, we had over 1,500 customers in more than 50 countries. In addition, our solutions are used to protect thousands of organizations through cloud-based deployments with our Software-as-a-Service (“SaaS”) customers and our managed security service provider (“MSSP”) and hosting partners. Our customers include four of the top five telecommunications companies, three of the top five commercial banks in the United States, three of the top five financial data service firms, three of the top five computer hardware companies, two of the top five food and drug store companies, over 150 government agencies around the world and more than 100 Fortune 1000 companies. We primarily sell our products and services through our network of over 350 channel partners worldwide, including both distributors and resellers, which provide sales and support leverage to our sales organization. We generated net revenue of $55.0 million in the nine months ended September 30, 2011, an increase of 43.2% over the $38.4 million in net revenue we generated in the same period in 2010. We generated net revenue of $55.4 million in 2010, an increase of 41% over the $39.3 million in net revenue we generated in 2009, and we reduced our net loss attributable to our stockholders to $12.0 million in 2010 from $12.3 million in 2009.

Industry Background

As a result of the rise in sophisticated attacks by hackers and malicious insiders, the difficulty in complying with regulations governing business data and the growing complexity of, and open access to, data centers, we believe that enterprises are struggling to provide visibility and control over business data that they need to protect.

 

 

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According to an International Data Corporation (“IDC”) report dated February 2011, worldwide spending on IT security products is expected to grow to $38 billion in 2014 from $27 billion in 2010. We believe that only a small fraction of this is spent today on protecting high-value business data in the data center. As a result, we believe data security represents a significant and growing opportunity because the current level of spending to protect high-value business data must dramatically increase in response to the magnitude of the threats to business data.

We believe the challenges that organizations face to control and protect high-value business data are driving the need for a new protection layer positioned closely around business data and systems in the data center.

 

  Ÿ  

High-value business data is increasingly targeted for illicit financial, political and military gain .    Organizations are increasing their collection, storage and use of high-value business data, including financial and credit card data, intellectual property and personally identifiable information. At the same time, the greater use and availability of this high-value business data has driven an increase in the monetary incentives for its theft and abuse. In addition, recent events, such as the data leaks publicized by WikiLeaks, demonstrate that the value of business data goes well beyond its financial value and includes political and military value.

 

  Ÿ  

Enterprises struggle to comply with an increasingly complex regulatory environment.     Governments and industry groups are enacting legislation and compliance standards to ensure that consumers and enterprises are informed of, and protected from, losses due to data breaches. As enterprises implement internal compliance policies and best practices intended to comply with regulatory requirements and secure high-value business data, they face a range of challenges prompted by the lack of visibility into the location and access rights of high-value business data as well as the cost and resource burden created by manual processes to audit data usage.

 

  Ÿ  

Increasing complexity of, and open access to, the data center is elevating the risk of attacks that target business data .    We believe that organizations continue to deploy new technologies and architectures that are increasing the complexity of, and accessibility to, the data center. The widespread use of web applications to facilitate sensitive business transactions, adoption of cloud computing and SaaS models that house sensitive data outside of the organization and the growth in unmanaged mobile computing, broaden the risks associated with business data by creating new points of vulnerability across the data center.

 

  Ÿ  

Increasing sophistication, scale and frequency of attacks drive the need for a dedicated layer of security for business data and applications .    Attackers, motivated by the value of business data and encouraged by the growing complexity of, and open access to, the data center, continue to increase the sophistication, scale and frequency of their attacks to steal high-value business data. For example, according to the Verizon 2011 Data Breach Investigations Report dated April 2011, the number of data breaches in 2010 due to internal and external attacks increased 5.4 times from 2009. Traditional security products have been unable to effectively prevent data breaches because:

 

   

perimeter content and network security solutions cannot address malicious insider threats, are not designed to prevent threats from insiders compromised by malware and are often circumvented by sophisticated application and business logic attacks; and

 

   

internal network security solutions, such as network firewalls and antivirus software, do not provide visibility and control over data usage by internal users and business systems.

 

 

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Need For a Broad Data Security Solution

As a result of these factors, we believe that organizations need a new approach to provide visibility and control over high-value business data across the data center. We believe that effectively addressing data security requires a solution that includes the following:

 

  Ÿ  

a broad and fully integrated platform that monitors and protects high-value business data across various systems in the data center;

 

  Ÿ  

automated capabilities to discover and classify high-value business data;

 

  Ÿ  

user rights management capabilities to ensure data access rights align with corporate policy;

 

  Ÿ  

auditing and reporting capabilities that enable a separation of duties;

 

  Ÿ  

sophisticated attack prevention technologies;

 

  Ÿ  

deployment flexibility through physical, virtual and SaaS offerings to address complex heterogeneous data center environments; and

 

  Ÿ  

integrated and centralized management.

Our Solution

Our solution includes our SecureSphere Data Security Suite for enterprise data centers and our cloud-based security services designed for mid-market enterprises and small to medium-sized businesses (“SMB”). Our SecureSphere Data Security Suite is an integrated, modular solution, which includes database, file and web application security and provides organizations with the following benefits:

 

  Ÿ  

Broad and unique solution that protects high-value business data.     Our solution is designed to secure business data across various systems in the data center, from storage within a database or on a file server to consumption through web applications, by monitoring all data usage and business transactions across these systems.

 

  Ÿ  

Automates discovery and classification of high-value business data.     Our solution is designed to provide enterprises visibility and control of business data by automatically identifying and classifying high-value business data, which enables enterprises to focus the scope of their risk mitigation and regulatory compliance efforts and to reduce the resources required for those projects.

 

  Ÿ  

Enables granular user rights management capabilities to reduce unwarranted data access.     Our solution enables organizations to aggregate and review user rights across multiple database platforms and file systems and to ensure that user access rights are aligned with corporate policy and compliance needs.

 

  Ÿ  

Facilitates large-scale, independent auditing and reporting of access to high-value business data.     Our solution provides visibility into data usage, establishes an audit trail that is independent from the database administration team to enable separation of duties and facilitates interactive and customizable reporting to address compliance and risk management needs.

 

  Ÿ  

Provides integrated protection against sophisticated threats.     Our solution leverages proprietary technology to detect and block advanced persistent threats and application-centric attacks.

 

  Ÿ  

Delivers flexible deployment models for complex and heterogeneous data center environments.     Our solution is offered as either a physical or virtual appliance to enable flexible deployment in any traditional or virtualized data center.

 

 

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  Ÿ  

Significantly improves operational efficiency.     Our solution provides automated capabilities that significantly reduce the need for manual processes as well as provides a single point for managing, monitoring and reporting on data security across applications, databases and files in the data center.

Our solution also includes cloud-based security services that we provide through our majority owned subsidiary, Incapsula, Inc., that deliver on-demand web application security that we believe is cost-effective and reduces the need for customers to deploy additional hardware or augment IT staff.

Our Strategy

Our goal is to extend our leadership position in the data security market. Key elements of our strategy include:

 

  Ÿ  

Enhance and extend our leadership position through technological and product innovation.     We intend to continue to invest in product upgrades and product line extensions and to create new products and services that address emerging data security and regulatory compliance requirements to maintain our technological advantages. We also plan to invest in advanced threat research to increase our threat intelligence leadership and to continue our investments in data security for cloud computing environments.

 

  Ÿ  

Further penetrate our existing customer base.     Many of our customers initially deploy our solution on a limited portion of their business systems, which provides us with significant opportunities to sell them more of our products. As a leading provider of a broad data security solution, we believe we are well positioned to benefit as our customers expand the scope of their data security and compliance initiatives.

 

  Ÿ  

Invest in our global distribution network to expand our customer base.     We believe that our hybrid sales model, which combines the leverage of a channel sales model with the account control of a direct sales model, has played an important role in our success to date. We intend to continue to invest significant resources to further strengthen our existing relationships with channel partners and to expand our network by adding new channel partners.

 

  Ÿ  

Pursue data security opportunities as businesses adopt cloud computing.     We believe data security is a paramount concern of enterprises as they consider the adoption of cloud computing. We intend to continue to focus on capturing the expected increases in spending on securing business data as enterprises pursue cloud computing initiatives.

 

  Ÿ  

Increase our focus on the mid-market and SMB market.     We believe there is a significant opportunity to provide data security solutions to smaller businesses as they are faced with increasing security threats and compliance mandates. We plan to increase our business with mid-market enterprises and SMBs by expanding our distribution channels and promoting the cloud-based web application firewall service that we provide through Incapsula, which is optimized for mid-market enterprises and SMBs.

 

  Ÿ  

Increase awareness of the importance of data security and drive adoption of our solution.      We plan to continue to increase market awareness of the benefits of our broad data security solution and to invest in our brand so that we can extend our leadership in the data security market.

 

 

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Risks Associated with our Business and an Investment in our Common Stock

Our business, financial condition, results of operations and prospects are subject to numerous risks. These risks include, among others, that:

 

  Ÿ  

we have a history of losses and we may not become profitable;

 

  Ÿ  

our quarterly operating results are likely to vary significantly and to be unpredictable;

 

  Ÿ  

the data security market is rapidly evolving and difficult to predict, and we may not anticipate market needs and opportunities, which could cause our business to suffer;

 

  Ÿ  

we face intense competition, especially from larger, better-known companies;

 

  Ÿ  

if our products fail to protect against malicious attacks and our customers experience security breaches, our reputation and business could be harmed; and

 

  Ÿ  

assertions by third parties that we violate their intellectual property rights or our failure to protect our intellectual property rights could substantially harm our business.

If we are unable to adequately address these and other risks we face, our business, financial condition, results of operations and prospects may be materially and adversely affected. In addition, there are numerous risks related to an investment in our common stock.

Following this offering, our executive officers, directors and 5% or greater stockholders will beneficially own, in the aggregate, approximately 63.2% of our outstanding common stock. If certain of our existing stockholders elect to purchase an aggregate of approximately $15,000,000 of our common stock in this offering, upon completion of this offering, our executive officers, directors and 5% or greater stockholders will beneficially own, in the aggregate, approximately 67.7% of our outstanding capital stock. These stockholders will have significant influence in determining the outcome of any corporate transaction or any other matter submitted for approval to our stockholders.

You should carefully read the section entitled “Risk Factors” beginning on page 10 for an explanation of the foregoing risks, as well as other risks, before investing in our common stock.

Company Information

We were incorporated as a Delaware corporation in 2002. Our principal executive office is located at 3400 Bridge Parkway, Suite 200, Redwood Shores, CA 94065. Our telephone number at our principal executive office is (650) 345-9000. Our website address is www.imperva.com . This is a textual reference only. We do not incorporate the information on, or accessible through, our website into this prospectus, and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.

We use various trademarks and trade names in our business, including without limitation “Imperva,” “SecureSphere,” and “Protecting the Data that Drives Business.” This prospectus also contains trademarks and trade names of other businesses that are the property of their respective holders. We have omitted the ® and ™ designations, as applicable, for the trademarks we name in this prospectus.

 

 

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THE OFFERING

 

Common stock offered by us

  

4,750,000 shares

Common stock offered by selling stockholders

  

250,000 shares

Common stock to be outstanding after this offering

  

22,101,695 shares

Option to purchase additional shares

   We have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an additional 750,000 shares of common stock from us.

Use of proceeds

  

We expect our net proceeds from this offering will be approximately $61.8 million (or approximately $72.2 million if the underwriters exercise their option to purchase additional shares in full), based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from shares sold by the selling stockholders.

 

We plan to use the net proceeds to us from this offering for working capital and other general corporate purposes. In addition, we will invest $3.5 million of the net proceeds to us from this offering in Incapsula, our majority owned subsidiary. For a more complete description of our intended use of proceeds from this offering, see the section entitled “Use of Proceeds.”

Proposed New York Stock Exchange symbol

  

“IMPV”

Certain entities associated with Accel Partners, Greylock Partners, Meritech Capital Partners, U.S. Venture Partners and Venrock and Shlomo Kramer, our President and Chief Executive Officer, each of which are our existing stockholders, have indicated an interest in purchasing up to an aggregate of approximately $15,000,000 of our common stock in this offering at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, these existing stockholders may elect not to purchase shares in this offering or the underwriters may elect not to sell any shares in this offering to such stockholders. The underwriters will receive the same discount from any shares of our common stock purchased by such stockholders as they will from any other shares of our common stock sold to the public in this offering. Any shares purchased by such stockholders will be subject to lock-up restrictions described in the section entitled “Shares Eligible for Future Sale.”

The number of shares of our common stock to be outstanding after this offering is based on 17,351,695 shares of our common stock outstanding as of September 30, 2011 and excludes:

 

  Ÿ  

2,944,899 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2011, and having a weighted average exercise price of $3.48 per share;

 

 

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  Ÿ  

19,999 shares of common stock issuable upon the exercise of two outstanding warrants to purchase convertible preferred stock, assuming the conversion immediately prior to the closing of this offering, at a weighted average exercise price of $3.00 per share;

 

  Ÿ  

1,929,152 shares of common stock reserved for future issuance under our equity incentive plans; and

 

  Ÿ  

500,000 shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan.

Unless otherwise indicated, the information in this prospectus assumes the following:

 

  Ÿ  

the filing of our restated certificate of incorporation and the adoption of our amended and restated bylaws, which will occur immediately prior to the closing of this offering;

 

  Ÿ  

a 1-for-2 reverse split of our issued and outstanding preferred stock and common stock to be effected prior to the effectiveness of this registration statement;

 

  Ÿ  

conversion of all of our shares of preferred stock into common stock, which we expect to occur immediately prior to the closing of this offering; and

 

  Ÿ  

no exercise by the underwriters of their option to purchase additional shares.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data. We have derived the summary consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010 from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the nine months ended September 30, 2010 and 2011 and the consolidated balance sheet data as of September 30, 2011 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial data have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which consist only of normal recurring adjustments, necessary to fairly reflect our consolidated results of operations data for the nine months ended September 30, 2010 and 2011 and our consolidated financial position as of September 30, 2011. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results for the nine months ended September 30, 2011 are not necessarily indicative of operating results to be expected for the full year ending December 31, 2011 or any other period. You should read the following summary consolidated financial data in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, related notes and other financial information included elsewhere in this prospectus.

 

    Years Ended December 31,     Nine Months Ended
September 30,
 
    2008     2009     2010     2010     2011  
    (in thousands, except share and per share amounts)  

Consolidated Statement of Operations Data:

         

Net revenue:

         

Products and license

  $ 24,298      $ 25,727      $ 34,479      $ 23,532      $ 32,821   

Services

    7,848        13,614        20,903        14,866        22,166   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    32,146        39,341        55,382        38,398        54,987   

Cost of revenue:

         

Products and license

    3,661        4,795        5,905        4,123        4,433   

Services

    3,455        4,576        6,428        4,639        7,062   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    7,116        9,371        12,333        8,762        11,495   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    25,030        29,970        43,049        29,636        43,492   

Operating expenses:

         

Research and development

    8,591        10,538        13,214        9,468        12,858   

Sales and marketing

    20,447        26,920        34,168        24,095        30,970   

General and administrative

    3,608        4,669        7,982        5,292        8,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    32,646        42,127        55,364        38,855        52,014   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (7,616     (12,157     (12,315     (9,219     (8,522

Other income (expense), net

    190        178        474        357        (238
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (7,426     (11,979     (11,841     (8,862     (8,760

Provision for income taxes

    229        360        527        331        471   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (7,655     (12,339     (12,368     (9,193     (9,231

Loss attributable to noncontrolling interest

    —          43        355        256        458   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Imperva, Inc. stockholders

  $ (7,655   $ (12,296   $ (12,013   $ (8,937   $ (8,773
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock attributable to Imperva, Inc. stockholders, basic and diluted(1)

  $ (1.98   $ (2.82   $ (2.46   $ (1.84   $ (1.64
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net loss per share of common stock, basic and diluted(1)

    3,860,033        4,365,359        4,884,665        4,846,160        5,334,581   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share of common stock attributable to Imperva, Inc. stockholders, basic and diluted(1)

      $ (0.77     $ (0.54
     

 

 

     

 

 

 

Shares used in computing pro forma net loss per share of common stock, basic and diluted(1)

        15,646,176          16,096,092   
     

 

 

     

 

 

 

 

 

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     As of September 30, 2011  
     Actual     Pro Forma(2)     Pro Forma as
Adjusted(3)
 
           (in thousands)        

Consolidated Balance Sheet Data:

      

Cash, cash equivalents and short-term investments

   $ 13,025      $ 13,025      $ 77,590   

Working capital (deficiency)

     (5,761     (5,538     60,164   

Total assets

     42,465        42,465        103,091   

Deferred revenue, current and long-term

     25,560        25,560        25,560   

Convertible preferred stock warrant liability

     223        —          —     

Convertible preferred stock

     53,442        —          —     

Noncontrolling interest

     (642     (642     (642

Total stockholders’ equity (deficit)

   $ (60,058   $ (6,393   $ 55,370   

 

(1) Please see Note 17 to our audited consolidated financial statements appearing elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per share of common stock and pro forma net loss per share of common stock.
(2) The pro forma column in the consolidated balance sheet data table above reflects (i) the conversion of all outstanding shares of our convertible preferred stock into 10,761,511 shares of common stock immediately prior to the closing of this offering and (ii) the resulting reclassification of the convertible preferred stock warrant liability to additional paid-in capital.
(3) The pro forma as adjusted column in the consolidated balance sheet data table above reflects (i) the conversion of all outstanding shares of our convertible preferred stock into 10,761,511 shares of common stock immediately prior to the closing of this offering, (ii) the resulting reclassification of the convertible preferred stock warrant liability to additional paid-in capital and (iii) the receipt of $61.8 million in net proceeds from the sale of 4,750,000 shares of common stock by us in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) our pro forma as adjusted cash, cash equivalents and short-term investments, working capital (deficiency), total assets and total stockholders’ equity by $4.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all other information contained in this prospectus, including our consolidated financial statements and the related notes thereto, before investing in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

Risks Related to Our Business

We have a history of losses, we may not become profitable and our revenue growth may not continue.

We have incurred net losses in each fiscal year since our inception, including net losses attributable to our stockholders of $7.7 million in 2008, $12.3 million in 2009, $12.0 million in 2010 and $8.8 million during the nine months ended September 30, 2011. As a result, we had an accumulated deficit of $64.6 million at September 30, 2011. We may not become profitable in the future if we fail to increase revenue and manage our expenses or if we incur unanticipated liabilities. Revenue growth may slow or revenue may decline for a number of possible reasons, including slowing demand for our products or services, increasing competition, a decrease in the growth of, or decline in, our overall market, or our failure to capitalize on growth opportunities or introduce new products and services. Any failure by us to achieve and maintain profitability and continue our revenue growth could cause the price of our common stock to materially decline.

Our limited operating history and the rapidly evolving nature of the markets in which we operate may make it difficult for you to evaluate our business.

We were incorporated in 2002, and since that time have been developing products to meet the rapidly evolving demands of customers in the markets in which we operate. We shipped our initial web application security and data security products in 2002, in 2006, we expanded our database security product to include compliance features and in 2010, we launched our file security offering. In addition, in 2010, we launched our cloud-based services with ThreatRadar and, in 2011, we introduced our cloud-based offerings for mid-market enterprises and small to medium-sized businesses (“SMB”) through Incapsula, Inc., our majority owned subsidiary. This limited operating history, as well as the early stage of our relationships with many of our channel partners, makes financial forecasting and evaluation of our business difficult. Furthermore, because we depend in part on the market’s acceptance of our products it is difficult to evaluate trends that may affect our business. We have limited historic financial data, and we operate in a rapidly evolving market, and, as such, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market.

Our quarterly operating results are likely to vary significantly and to be unpredictable, which could cause the trading price of our stock to decline.

Our operating results have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control, including:

 

  Ÿ  

the level of demand for our products and services, and the timing of orders from our channel partners and end-user customers, who we refer to in this prospectus as our customers;

 

  Ÿ  

the timing of shipments of products, which may depend on many factors such as inventory and logistics and our ability to ship new products on schedule and accurately forecast inventory requirements;

 

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  Ÿ  

the mix of products sold, the mix of revenue between products and services and the degree to which products and services are bundled and sold together for a package price;

 

  Ÿ  

seasonal buying patterns of our customers;

 

  Ÿ  

the level of perceived threats to data security, which may fluctuate from period to period;

 

  Ÿ  

changes in customer, distributor or reseller requirements or market needs;

 

  Ÿ  

changes in the growth rate of the data security market;

 

  Ÿ  

the timing and success of new product and service introductions by us or our competitors or any other change in the competitive landscape of our industry, including consolidation among our competitors or customers;

 

  Ÿ  

the introduction or adoption of new technologies that compete with our products and services;

 

  Ÿ  

deferral of orders from customers in anticipation of new products or product enhancements announced by us or our competitors;

 

  Ÿ  

decisions by potential customers to purchase data security solutions from larger, more established security vendors or from their primary network equipment vendors;

 

  Ÿ  

the announcement or adoption of new data security compliance regulations or changes to existing compliance regulations;

 

  Ÿ  

price competition;

 

  Ÿ  

insolvency or credit difficulties confronting our customers, affecting their ability to purchase or pay for our products and services;

 

  Ÿ  

insolvency or credit difficulties confronting our key suppliers, which could disrupt our supply chain;

 

  Ÿ  

changes in customer renewal rates for our services;

 

  Ÿ  

general economic conditions, both domestically and in our foreign markets;

 

  Ÿ  

the timing of revenue recognition for our sales, which may be affected by both the mix of sales by our channel partners and the extent to which we bring on new resellers and distributors;

 

  Ÿ  

future accounting pronouncements or changes in our accounting policies; and

 

  Ÿ  

increases or decreases in our expenses caused by fluctuations in foreign currency exchange rates, particularly the Israeli shekel, since a significant portion of our expenses are incurred and paid in the Israeli shekel and other currencies besides the U.S. dollar.

Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our quarterly operating results. This variability and unpredictability could result in our failure to meet our revenue or other operating result expectations or those of securities analysts or investors for a particular period. In addition, a significant percentage of our operating expenses are fixed in nature and based on forecasted revenue trends. Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate the negative impact on margins in the short term. If we fail to meet or exceed expectations for our business for these or any other reasons, the market price of our shares could fall substantially and we could face costly lawsuits, including securities class action suits.

 

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The data security market is rapidly evolving and difficult to predict. If the data security market does not evolve as we anticipate or if customers do not adopt our broad data security solution, our sales will not grow as quickly as anticipated and our stock price could decline.

We are in a new, rapidly evolving category in the security industry that focuses on securing our customers’ high-value business data. As such, it is difficult to predict important market trends, including how large the data security market will be and what products customers will adopt. For example, organizations that use other security products, such as network firewalls, security information and event management (“SIEM”) products or data loss prevention (“DLP”) solutions, may believe that these security solutions sufficiently protect access to sensitive data. Therefore, they may continue spending their IT security budgets on these products and may not adopt our data security solutions in addition to such products.

We offer database, file and web application security in an integrated, modular data security solution. Currently less than half of our customers have purchased more than one of our product families. Even if customers purchase our products, they may not make repeat purchases or purchase other elements of our SecureSphere Data Security Suite.

If the market for data security does not evolve in the way we anticipate, if customers do not recognize the benefit our data security solution offers in addition to existing security products, or if we are unable to sell our entire data security solution to customers, then our revenue may not grow quickly or may decline, and our stock price could decline.

If we do not successfully anticipate market needs and opportunities and enhance our products and develop new products that meet those needs and opportunities on a timely basis, we may not be able to compete effectively and our ability to generate revenues will suffer.

The data security market is characterized by rapid technological advances, changes in customer requirements, including customer requirements driven by changes to legal, regulatory and self-regulatory compliance mandates, frequent new product introductions and enhancements and evolving industry standards in computer hardware and software technology. As a result, we must continually change and improve our products in response to changes in operating systems, application software, computer and communications hardware, networking software, data center architectures, programming tools and computer language technology. Moreover, the technology in our products is especially complex because it needs to effectively identify and respond to methods of attack and theft, while minimizing the impact on database, file system and web application performance. In addition, our products must successfully interoperate with products from other vendors.

We cannot guarantee that we will be able to anticipate future market needs and opportunities or be able to develop product enhancements or new products to meet such needs or opportunities in a timely manner or at all. Even if we are able to anticipate, develop and commercially introduce enhancements and new products, there can be no assurance that enhancements or new products will achieve widespread market acceptance. For example, while the majority of our current revenues are derived from the sales of our SecureSphere appliances, we are now offering cloud-based data security services through Incapsula. The market for cloud-based data security solutions is relatively new and it is uncertain whether Incapsula’s services will gain market acceptance.

Our product enhancements or new products could fail to attain sufficient market acceptance for many reasons, including:

 

  Ÿ  

delays in releasing our enhancements or new products;

 

  Ÿ  

failure to accurately predict market demand in terms of product functionality and to supply products that meet this demand in a timely fashion;

 

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  Ÿ  

inability to interoperate effectively with the database technologies, file systems or web applications of our prospective customers;

 

  Ÿ  

inability to protect against new types of attacks or techniques used by hackers or other data thieves;

 

  Ÿ  

defects, errors or failures;

 

  Ÿ  

negative publicity about their performance or effectiveness;

 

  Ÿ  

introduction or anticipated introduction of competing products by our competitors;

 

  Ÿ  

poor business conditions, causing customers to delay IT purchases;

 

  Ÿ  

easing or changing of regulatory requirements related to security; and

 

  Ÿ  

reluctance of customers to purchase products incorporating open source software.

If we fail to anticipate market requirements or fail to develop and introduce product enhancements or new products to meet those needs in a timely manner, it could cause us to lose customers and such failure could substantially decrease or delay market acceptance and sales of our present and future products, which would significantly harm our business, financial condition and results of operations.

We face intense competition, especially from larger, better-known companies and we may lack sufficient financial or other resources to maintain or improve our competitive position.

The market for data security products is intensely competitive and we expect competition to intensify in the future. Our competitors include companies such as Citrix Systems, Inc., F5 Networks, Inc., International Business Machines Corporation (“IBM”), McAfee, Inc. (a subsidiary of Intel Corporation), Oracle Corporation, Symantec Corporation and other point solution security vendors.

Many of our existing and potential competitors may have substantial competitive advantages such as:

 

  Ÿ  

greater name recognition and longer operating histories;

 

  Ÿ  

larger sales and marketing budgets and resources;

 

  Ÿ  

broader distribution networks and more established relationships with distributors and customers;

 

  Ÿ  

access to larger customer bases;

 

  Ÿ  

greater customer support resources;

 

  Ÿ  

greater resources to make acquisitions;

 

  Ÿ  

greater resources to develop and introduce products that compete with our products;

 

  Ÿ  

lower labor and development costs; and

 

  Ÿ  

substantially greater financial, technical and other resources.

In addition, some of our larger competitors have substantially broader product offerings and leverage their relationships based on other products or incorporate functionality into existing products in a manner that discourages customers from purchasing our products. Customers may elect to accept a bundled product offering from our competitors, even if it has more limited functionality than our product offering, instead of adding the additional appliances required to implement our offering. These larger competitors are also often in a better position to withstand any significant reduction in capital

 

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spending, and will therefore not be as susceptible to economic downturns. Also, many of our smaller competitors that specialize in providing protection from a single type of data security threat may deliver these specialized data security products to the market more quickly than we can. Conditions in our markets could change rapidly and significantly as a result of technological advancements or continuing market consolidation.

Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their resources. Current or potential competitors may be acquired by third parties with greater available resources, such as IBM’s acquisition of Guardium, Inc., Oracle’s acquisition of Secerno, Ltd. and McAfee’s acquisition of Sentrigo, Inc. As a result of such acquisitions, our current or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their product and service offerings more quickly than we do. Larger competitors with more diverse product offerings may reduce the price of products that compete with ours in order to promote the sale of other products or may bundle them with other products, which would lead to increased pricing pressure on our products and could cause the average sales prices for our products to decline. If we are unable to compete effectively for a share of the data security market, our business, results of operations and financial condition could be materially and adversely affected.

New or existing technologies that are perceived to address data security risks or address the risks in different ways could gain wide adoption and supplant our products and services, thereby weakening our sales and our financial results.

The introduction of products and services embodying new technologies could render our existing products and services obsolete or less attractive to customers. Other data security technologies exist or could be developed in the future, and our business could be materially negatively affected if such technologies are widely adopted. We may not be able to successfully anticipate or adapt to changing technology or customer requirements on a timely basis, or at all. If we fail to keep up with technological changes or to convince our customers and potential customers of the value of our solutions even in light of new technologies, our business, results of operations and financial condition could be materially and adversely affected.

If our products fail to protect against malicious attacks and our customers experience security breaches, our reputation and business could be harmed.

Data thieves are increasingly sophisticated, often affiliated with organized crime and operate large scale and complex automated attacks. In addition, their techniques change frequently and generally are not recognized until launched against a target. If we fail to identify and respond to new and increasingly complex methods of attack and to update our products to detect or prevent such threats in time to protect our customers’ high-value business data, our business and reputation will suffer.

In addition, an actual or perceived security breach or theft of the sensitive data of one of our customers, regardless of whether the breach is attributable to the failure of our products or services, could adversely affect the market’s perception of our security products. Despite our best efforts, there is no guarantee that our products will be free of flaws or vulnerabilities, and even if we discover these weaknesses we may not be able to correct them promptly, if at all. Our customers may also misuse our products, which could result in a breach or theft of business data.

 

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False detection of security breaches or false identification of malicious sources could adversely affect our business.

Our data security products may falsely detect threats that do not actually exist. For example, our ThreatRadar product relies on information on attack sources aggregated from third-party data providers who monitor global malicious activity originating from anonymous proxies, specific IP addresses, botnets and phishing sites. If the information from these data providers is inaccurate, the potential for false positives increases. These false positives, while typical in the industry, may impair the perceived reliability of our products and may therefore adversely impact market acceptance of our products. If our products and services restrict access to important databases, files or applications based on falsely identifying users or traffic as an attack or otherwise unauthorized, this could adversely affect customers’ businesses. Any such false identification of users or traffic could result in negative publicity, loss of customers and sales, increased costs to remedy any problem and costly litigation.

If our internal network system is compromised by computer hackers or other data thieves, public perception of our products and services will be harmed.

We will not succeed unless the marketplace is confident that we provide effective data security protection. We provide data security products, and therefore we may be a more attractive target for attacks by computer hackers or other data thieves. If we experience an actual or perceived breach of our network or data security in our internal systems, it could adversely affect the market perception of our products and services. In addition, such a security breach could impair our ability to operate our business, including our ability to provide subscription or maintenance and support services to our customers. If this happens, our revenue could decline and our business could suffer.

Defects in our products or services could harm our reputation and business.

Our products and services are very complex and have contained and may contain undetected defects or errors, especially when first introduced or when new versions are released. Defects in our products may impede or block network traffic or cause our products or services to fail to help secure high-value business data. Defects in our products may lead to product returns and require us to implement design changes or software updates.

Any defects or errors in our products, or the perception of such defects or errors, could result in:

 

  Ÿ  

expenditure of significant financial and product development resources in efforts to analyze, correct, eliminate or work around errors or defects;

 

  Ÿ  

loss of existing or potential customers or channel partners;

 

  Ÿ  

delayed or lost revenue;

 

  Ÿ  

delay or failure to attain market acceptance;

 

  Ÿ  

delay in the development or release of new products or services;

 

  Ÿ  

negative publicity, which will harm our reputation;

 

  Ÿ  

warranty claims against us, which could result in an increase in our provision for doubtful accounts;

 

  Ÿ  

an increase in collection cycles for accounts receivable or the expense and risk of litigation; and

 

  Ÿ  

harm to our results of operations.

Although we have limitation of liability provisions in our standard terms and conditions of sale, they may not fully or effectively protect us from claims as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries. The sale and

 

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support of our products also entail the risk of product liability claims. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not adequately cover any claim asserted against us. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation and divert management’s time and other resources.

If our products fail to help our customers achieve and maintain compliance with government regulations and industry standards, our business and results of operations could be materially adversely affected.

We generate a substantial portion of our revenues from our products and services because they help organizations achieve and maintain compliance with government regulations and industry standards, and we expect that will continue for the foreseeable future. For example, many of our customers purchase our web application security products to help them comply with the security standards developed and maintained by the Payment Card Industry (“PCI”) Security Standards Council (the “PCI Council”), which apply to companies that process or store credit card information. Industry organizations like the PCI Council may significantly change their security standards with little or no notice, including changes that could make their standards more or less onerous for businesses. Governments may also adopt new laws or regulations, or make changes to existing laws or regulations, that could impact whether our products and services enable our customers to demonstrate, maintain or audit their compliance. If we are unable to adapt our products and services to changing regulatory standards in a timely manner, or if our products fail to expedite our customers’ compliance initiatives, our customers may lose confidence in our products and could switch to products offered by our competitors. In addition, if regulations and standards related to data security are changed in a manner that makes them less onerous, our customers may view government and industry regulatory compliance as less critical to their businesses, and our customers may be less willing to purchase our products and services. In either case, our sales and financial results would suffer.

We rely on third party channel partners to generate substantially all of our revenue, and if we fail to expand and manage our distribution channels, our revenues could decline and our growth prospects could suffer.

We derive substantially all of our revenues from sales of our products and services through channel partners, such as resellers, and we expect that channel sales will represent a substantial portion of our revenues for the foreseeable future. Our ability to expand our distribution channels depends in part on our ability to educate our channel partners about our products and services, which are complex. Our agreements with our channel partners are generally non-exclusive and many of our channel partners have more established relationships with our competitors. If our channel partners choose to place greater emphasis on products and services of their own or those offered by our competitors, our ability to grow our business and sell our products may be adversely affected. If our channel partners do not effectively market and sell our products and services, or if they fail to meet the needs of our customers, then our ability to grow our business and sell our products may be adversely affected. The loss of one or more of our larger channel partners, who may cease marketing our products with limited or no notice, and our possible inability to replace them could adversely affect our sales. Our failure to recruit additional channel partners, or any reduction or delay in their sales of our products and services or conflicts between channel sales and our direct sales and marketing activities could materially and adversely affect our results of operations.

If we are unable to increase market awareness of our company and our products, our revenue may not continue to grow, or may decline.

We have a limited operating history and we believe that we have not yet established sufficient market awareness in the data security market. Market awareness of our capabilities and products is

 

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essential to our continued growth and our success in all of our markets, particularly for the large enterprise, service provider and government entities markets. If our marketing programs are not successful in creating market awareness of our company and products, our business, financial condition and results of operations will be adversely affected, and we will not be able to achieve sustained growth.

Reliance on a concentration of shipments at the end of the quarter could cause our revenue to fall below expected levels, resulting in a decline in our stock price.

Historically, we have received a substantial portion of a quarter’s sales orders and generated a substantial portion of a quarter’s revenue during the last two weeks or last days of the quarter. The fact that so many orders arrive at the end of a quarter means that our revenue may move from one quarter to the next if we cannot fulfill all of the orders and satisfy all of the revenue recognition criteria under our accounting policies before the quarter ends.

This pattern is a result of customer buying habits and the efforts of our sales force and channel partners to meet or exceed quarterly quotas. If expected revenue at the end of any quarter is delayed because anticipated purchase orders fail to materialize, our logistics partners’ fail to ship products on time, we fail to manage our inventory properly, we fail to release new products on schedule, or for any other reason, then our revenue for that quarter could fall below our expectations or those of securities analysts and investors, resulting in a decline in our stock price.

Delays or interruptions in the manufacturing and delivery of SecureSphere appliances by our sole source manufacturer may harm our business.

Our hardware appliances are built by a single manufacturer. Our reliance on a sole manufacturer, particularly a foreign manufacturer, involves several risks, including a potential inability to obtain an adequate supply of appliances and limited control over pricing, quality and timely delivery of products. In addition, replacing this manufacturer may be difficult and could result in an inability or delay in obtaining products.

Our manufacturer’s ability to timely manufacture and ship our appliances in large quantities depends on a variety of factors. The manufacturer relies on a limited number of sources for the supply of functional components, such as semiconductors, printed circuit boards and hard disk drives. Functional component supply shortages or delays could prevent or delay the manufacture and shipment of appliances and, in the event of shortages or delays, we may not be able to procure alternative functional components on similar pricing terms, if at all. In addition, contractual restrictions or claims for infringement of intellectual property rights may restrict our manufacturer’s use of certain components. These restrictions or claims may require our manufacturer to utilize alternative components or obtain additional licenses or technologies, and may impede its ability to manufacture and deliver appliances on a timely or cost-effective basis.

In the event of an interruption from this manufacturer, we may not be able to develop alternate or secondary sources in a timely manner. If we are unable to buy our appliances in quantities sufficient to meet our requirements on a timely basis, we will not be able to deliver products to our channel partners and customers, which would seriously affect present and future sales.

We have operations outside of the United States and a significant portion of our customers and suppliers are located outside of the United States, which subjects us to a number of risks associated with conducting international operations.

We market and sell our products throughout the world and have personnel in many parts of the world. In addition, we have sales offices and research and development facilities outside the United

 

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States and we conduct, and expect to continue to conduct, a significant amount of our business with companies that are located outside the United States, particularly in Israel, Asia and Europe. We also source our components for our products from various geographical regions and ship products from a foreign production facility. Therefore, we are subject to risks associated with having international sales and worldwide operations, including:

 

  Ÿ  

trade and foreign exchange restrictions;

 

  Ÿ  

foreign currency exchange fluctuations;

 

  Ÿ  

economic or political instability in foreign markets;

 

  Ÿ  

greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods;

 

  Ÿ  

changes in regulatory requirements;

 

  Ÿ  

difficulties and costs of staffing and managing foreign operations;

 

  Ÿ  

the uncertainty and limitation of protection for intellectual property rights in some countries;

 

  Ÿ  

costs of compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations;

 

  Ÿ  

costs of complying with U.S. laws and regulations for foreign operations, including the Foreign Corrupt Practices Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our products in certain foreign markets, and the risks and costs of non-compliance;

 

  Ÿ  

heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements;

 

  Ÿ  

the potential for political unrest, acts of terrorism, hostilities or war;

 

  Ÿ  

management communication and integration problems resulting from cultural differences and geographic dispersion; and

 

  Ÿ  

multiple and possibly overlapping tax structures.

Our product and service sales may be subject to foreign governmental regulations, which vary substantially from country to country and change from time to time. Failure to comply with these regulations could adversely affect our business. Further, in many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. Although we implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, channel partners and agents will comply with these laws and policies. Violations of laws or key control policies by our employees, contractors, channel partners or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties or the prohibition of the importation or exportation of our products and services and could have a material adverse effect on our business and results of operations.

We rely significantly on revenue from services which may decline and, because we recognize revenue from services over the term of the relevant service period, downturns or upturns in sales are not immediately reflected in full in our operating results.

Our services revenue accounted for 24.4% of our total revenue for fiscal 2008, 34.6% of our total revenue for fiscal 2009, 37.7% of our total revenue for fiscal 2010 and 40.3% of our total revenue for

 

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the nine months ended September 30, 2011. Sales of new or renewal services contracts may decline or fluctuate as a result of a number of factors, including customers’ level of satisfaction with our products and services, the prices of our products and services, the prices of products and services offered by our competitors or reductions in our customers’ spending levels. If our sales of new or renewal services contracts decline, our revenue or revenue growth may decline and our business will suffer. In addition, we recognize service revenue ratably over the term of the relevant service period, which is typically one to three years but has been as long as five years. As a result, much of the revenue we report each quarter is the recognition of deferred revenue from services contracts entered into during previous quarters. Consequently, a decline in new or renewal services contracts in any one quarter will not be fully reflected in revenue in that quarter, but will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new or renewed sales of our services would not be reflected in full in our results of operations until future periods.

If we are unable to increase sales to larger customers, our results of operations may suffer.

We continuously seek to increase sales of our products to large enterprises, managed security service providers and government entities. Sales to enterprises, service providers and government entities involve risks that may not be present, or are present to a lesser extent, with sales to small to mid-sized entities. These risks include:

 

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preexisting relationships with larger, entrenched providers of security solutions who have access to key decision makers within the organization and who also have the ability to bundle competing products with a broader product offering;

 

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increased purchasing power and leverage held by large customers in negotiating contractual arrangements with us;

 

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more stringent requirements in our support service contracts, including stricter support response times, and increased penalties for any failure to meet support requirements; and

 

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longer sales cycles and the associated risk that substantial time and resources may be spent on a potential customer who elects not to purchase our products and services.

In addition, product purchases by enterprises, managed security service providers, cloud hosting providers and government entities are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. Large enterprises, managed security service providers, cloud hosting providers and government entities typically have longer implementation cycles; require greater product functionality and scalability and a broader range of services; demand that vendors take on a larger share of risks; sometimes require acceptance provisions that can lead to a delay in revenue recognition; and expect greater payment flexibility from vendors. All these factors can add risk to doing business with these customers. If our sales expectations for a large customer do not materialize in a particular quarter or at all, then our business, operating results and financial condition could be materially and adversely affected.

We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.

Our functional and reporting currency is the U.S. dollar and we generate a majority of our revenue in U.S. dollars. However, in 2010, we incurred approximately 27% of our expenses outside of the United States in foreign currencies, primarily Israeli shekels, principally with respect to salaries and related personnel expenses associated with our Israeli operations. Accordingly, changes in exchange rates may have a material adverse effect on our business, operating results and financial condition. The exchange rate between the U.S. dollar and foreign currencies has fluctuated substantially in recent years and may continue to fluctuate substantially in the future. We expect that a majority of our

 

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revenues will continue to be generated in U.S. dollars for the foreseeable future and that a significant portion of our expenses, including personnel costs, as well as capital and operating expenditures, will continue to be denominated in Israeli shekels. The results of our operations may be adversely affected by foreign exchange fluctuations.

We use forward foreign exchange contracts to hedge or mitigate the effect of changes in foreign exchange rates on our operating expenses denominated in certain foreign currencies. However, we may not be able to purchase derivative instruments that are adequate to insulate ourselves from foreign currency exchange risks. Additionally, our hedging activities may contribute to increased losses as a result of volatility in foreign currency markets.

If our existing and potential customers migrate to hosted, cloud-based data centers that do not deploy our products, our revenues could suffer.

The majority of our current sales are made through a model in which our channel partners sell our data security solutions to large enterprise customers that operate their own data centers and have the ability to choose the data security solutions and configurations to fit their environment. If our large enterprise customers and potential customers choose to outsource the hosting of their data centers to large, multi-tenancy hosting providers like Rackspace Hosting, Inc. and Amazon.com, Inc., they may not be able to choose what data security solutions are deployed in these hosted environments, and our current sales model may not be effective. Although we work with large hosting services providers, like Rackspace Hosting, Inc. and Savvis, Inc., to integrate our data security solutions into their hosting environments so our solutions may be offered to their hosting customers, we cannot guarantee that all such hosting service providers will adopt our solutions, offer them as a choice to their customers or promote our solutions over those of our competitors. Even if these large hosting services providers integrate our data security solutions into their hosting environments and promote our solutions, they may be able to negotiate larger discounts than individual enterprise customers and, consequently, the average selling price of our products may decrease and our revenue would suffer.

Our business and operations have experienced rapid growth, and if we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results will be negatively affected.

We have experienced rapid growth over the last several years. We rely heavily on information technology systems to help manage critical functions such as order processing, revenue recognition, financial forecasts and inventory and supply chain management. To manage any future growth effectively, and in connection with our transition to a publicly-listed company, we must continue to improve and expand our information technology and financial infrastructure, operating and administrative systems and controls, and continue to manage headcount, capital and processes in an efficient manner. We may not be able to successfully implement improvements to these systems and processes in a timely or efficient manner. For instance, over the last several years we have used and relied heavily on Priority, an enterprise resource planning (“ERP”) system, made by Eshibel Technologies Ltd., an Israeli software company. In the first quarter of 2011, we decided to replace Priority with NetSuite, an on-demand ERP system, and commenced a several month process to implement NetSuite. We have a limited operating history using NetSuite and may encounter difficulties using NetSuite to manage critical functions of our business. Such difficulties with our transition to NetSuite could include delays in calculating and reporting our quarterly results.

In addition, we rely heavily on hosted, Software-as-a-Service (“SaaS”) technologies from third parties in order to operate critical functions of our business, including ERP services from NetSuite and customer relationship management (“CRM”) services from salesforce.com, inc. If these services become unavailable due to extended outages, interruptions or because they are no longer available on

 

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commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our products and services and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and integrated; all of which could harm our business.

Also, our systems and processes may not prevent or detect all errors, omissions or fraud. Our failure to improve our systems and processes, or their failure to operate in the intended manner, may result in our inability to manage the growth of our business and to accurately forecast our revenue, expenses and earnings, or to prevent certain losses. Our productivity and the quality of our products and services may also be adversely affected if we do not integrate and train our new employees quickly and effectively. Any future growth would add complexity to our organization and require effective coordination across our organization. Failure to manage any future growth effectively could result in increased costs, harm our results of operations and lead to investors losing confidence in our internal systems and processes, any of which could result in a decline in our stock price.

Assertions by third parties of infringement or other violations by us of their intellectual property rights could result in significant costs and substantially harm our business and operating results.

Patent and other intellectual property disputes are common in the IT security industry. Some companies in the IT security industry, including some of our competitors, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims against us. Third parties have asserted and may in the future assert claims of infringement, misappropriation or other violations of intellectual property rights against us. They may also assert such claims against our customers or channel partners whom we typically indemnify against claims that our products infringe, misappropriate or otherwise violate the intellectual property rights of third parties. As the numbers of products and competitors in our market increase and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase. Any claim of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from our business.

The patent portfolios of our most significant competitors are larger than ours. This disparity between our patent portfolio and the patent portfolios of our most significant competitors may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses. In addition, future assertions of patent rights by third parties, and any resulting litigation, may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may therefore provide little or no deterrence or protection. We cannot assure you that we are not infringing or otherwise violating any third-party intellectual property rights.

An adverse outcome of a dispute may require us to pay substantial damages including treble damages if we are found to have willfully infringed a third party’s patents or copyrights; cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to attempt to redesign our products or services or otherwise to develop non-infringing technology, which may not be successful; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property rights; and indemnify our partners and other third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Any of these events could seriously harm our business, financial condition and results of operations.

 

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We have in the past been sued for patent infringement, and likely will be involved in additional disputes in the future. We expect that we will be sued for patent infringement in the future, regardless of the merits of any such lawsuits. The cost to defend such lawsuits and any adverse result in such lawsuits could have a material adverse effect on our results of operations and financial condition.

We rely on the availability of licenses to third-party software and other intellectual property.

Many of our products and services include software or other intellectual property licensed from third parties, and we otherwise use software and other intellectual property licensed from third parties in our business. This exposes us to risks over which we may have little or no control. For example, a licensor may have difficulties keeping up with technological changes or may stop supporting the software or other intellectual property that it licenses to us. Also, it will be necessary in the future to renew licenses, expand the scope of existing licenses or seek new licenses, relating to various aspects of these products and services, or otherwise relating to our business, which may result in increased license fees. There can be no assurance that the necessary licenses will be available on acceptable terms, if at all. In addition, a third party may assert that we or our customers are in breach of the terms of a license, which could, among other things, give such third party the right to terminate a license or seek damages from us, or both. The inability to obtain or maintain certain licenses or other rights or to obtain or maintain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could result in delays in releases of products and services, and could otherwise disrupt our business, until equivalent technology can be identified, licensed or developed, if at all, and integrated into our products and services or otherwise in the conduct of our business. Any of these events could have a material adverse effect on our business, operating results and financial condition. Moreover, the inclusion in our products and services of software or other intellectual property licensed from third parties on a nonexclusive basis could limit our ability to differentiate our products from those of our competitors.

Our products contain third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products.

Our products, services and other technologies contain software modules licensed to us by third-party authors under so-called “open source” licenses, including the GNU Public License (“GPL”), the GNU Lesser Public License (“LGPL”), the BSD License, the Apache License and others. From time to time, there have been claims against companies that distribute or use open source software in their products and services, asserting that open source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming infringement of intellectual property rights in what we believe to be licensed open source software. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Numerous open source licenses require that source code subject to the license be made available to the public and that any modifications or derivative works to open source software continue to be licensed under open source licenses. If we combine our proprietary software with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software to the public. Disclosing the source code of our proprietary software could make it easier for hackers and other third parties to discover vulnerabilities in or to defeat the protections of our data security products, which could result in our data security products failing to protect our customers’ business data. This could harm our business and reputation. Disclosing our proprietary source code also could allow our competitors to create similar products with lower development effort and time and ultimately could result in a loss of product sales for us. Any of these events could have a material adverse effect on our business, operating results and financial condition.

 

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Although we monitor our use of open source software to avoid subjecting our products to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In this event, we could be required to seek licenses from third parties to continue offering our products, to make our proprietary code generally available in source code form, to re-engineer our products or to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition.

Failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.

The success of our business depends on our ability to protect and enforce our trade secrets, trademarks, copyrights, patents and other intellectual property rights. We attempt to protect our intellectual property under patent, trademark, copyright and trade secret laws, and through a combination of confidentiality procedures, contractual provisions and other methods, all of which offer only limited protection.

We currently have four issued patents in the United States, but this number is relatively small in comparison to our competitors. As of September 30, 2011, we had nine pending U.S. patent applications, and may file additional patent applications in the future. The process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. We may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions. Furthermore, it is possible that our patent applications may not issue as granted patents, that the scope of our issued patents will be insufficient or not have the coverage originally sought, that our issued patents will not provide us with any competitive advantages, and that our patents and other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. In addition, issuance of a patent does not guarantee that we have an absolute right to practice the patented invention. As a result, we may not be able to obtain adequate patent protection or to enforce our issued patents effectively.

In addition to patented technology, we rely on our unpatented proprietary technology and trade secrets. Despite our efforts to protect our proprietary technology and trade secrets, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. The contractual provisions that we enter into with employees, consultants, partners, vendors and customers may not prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or intellectual property rights. Moreover, policing unauthorized use of our technologies, products and intellectual property is difficult, expensive and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. We may be unable to determine the extent of any unauthorized use or infringement of our products, technologies or intellectual property rights.

From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results and financial condition. If we are unable to protect our intellectual property rights, we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time and effort required to create the innovative products that have enabled us to be successful to date.

 

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If we are unable to hire, retain and motivate qualified personnel, our business would suffer.

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel or delays in hiring required personnel, particularly in engineering and sales, may seriously harm our business, financial condition and results of operations. Any of our employees may terminate their employment at any time. Our ability to continue to attract and retain highly skilled personnel will be critical to our future success. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay Area and in Tel Aviv, Israel, the locations in which we have a substantial presence and need for highly-skilled personnel. In addition, a large portion of our employee base is substantially vested in significant stock option grants, and the ability to exercise those options and sell their stock in a public market after the closing of this offering may result in a larger than normal turn-over rate. We intend to issue stock options and restricted stock units as key components of our overall compensation and employee attraction and retention efforts. In addition, we are required under U.S. generally accepted accounting principles (“GAAP”) to recognize compensation expense in our operating results for employee share-based compensation under our equity grant programs, which may negatively impact our operating results and may increase the pressure to limit share-based compensation. Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information.

We are dependent on the continued services and performance of our senior management and other key employees, the loss of any of whom could adversely affect our business, operating results and financial condition.

Our future performance depends on the continued services and continuing contributions of our senior management and other key employees to execute on our business plan, and to identify and pursue new opportunities and product innovations. The loss of services of senior management or other key employees, particularly Shlomo Kramer, one of our founders and our President and Chief Executive Officer; Amichai Shulman, one of our founders and our Chief Technology Officer; and Terrence J. Schmid, our Chief Financial Officer and Treasurer, could significantly delay or prevent the achievement of our development and strategic objectives. The loss of the services of our senior management or other key employees for any reason could adversely affect our business, financial condition and results of operations.

Conditions in Israel may limit our ability to develop and sell our products. This could result in a decrease of our revenues.

Our principal research and development facilities are located in Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, as well as incidents of civil unrest. Political, economic and military conditions in Israel could directly affect our operations. We could be adversely affected by any major hostilities involving Israel, including acts of terrorism or any other hostilities involving or threatening Israel, the interruption or curtailment of trade between Israel and its trading partners, a significant increase in inflation or a significant downturn in the economic or financial condition of Israel. Any on-going or future violence between Israel and the Palestinians, armed conflicts, terrorist activities, tension along the Israeli borders or political instability in the region could disrupt international trading activities in Israel and may materially and negatively affect our business and could harm our results of operations.

Certain countries, as well as certain companies and organizations, continue to participate in a boycott of Israeli firms, firms with large Israeli operations and others doing business with Israel and Israeli companies. We are also precluded from marketing our products to certain of these countries

 

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due to United States and Israeli regulatory restrictions. In addition, such boycott, restrictive laws, policies or practices may change over time and we cannot predict which countries, as well as whether certain companies and organizations, will be subject thereto. The boycott, restrictive laws, policies or practices directed towards Israel, Israeli businesses or Israeli citizens could, individually or in the aggregate, have a material adverse affect on our business in the future.

Some of our executive officers and employees in Israel are obligated to perform annual military reserve duty in the Israel Defense Forces, depending on their age and position in the armed forces. Furthermore, they may be called to active reserve duty at any time under emergency circumstances for extended periods of time. Our operations could be disrupted by the absence, for a significant period, of one or more of our executive officers or key employees due to military service, and any significant disruption in our operations could harm our business.

Outages, interruptions or delays in hosting services could impair the delivery of our cloud-based security services and harm our business.

The cloud-based security services that we provide through our majority owned subsidiary, Incapsula, are operated from a network of third party facilities that host the software and systems that operate these security services. We currently serve our customers from third-party hosting facilities located in the United States and Europe. We have a limited operating history for our cloud-based security services in these third party hosting facilities. In addition, we operate the infrastructure that supports our ThreatRadar and Security Operations Center (“SOC”) services. Despite precautions taken within our own internal network and at these third party facilities, the occurrence of a natural disaster or an act of terrorism or other unanticipated problems could result in lengthy interruptions in our services.

In addition, any damage to, or failure of, our internal systems or systems at third party hosting facilities could result in outages or interruptions in our cloud-based services. Outages or interruptions in our cloud-based security services may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our cloud-based security services are unreliable.

Adverse economic conditions or reduced information technology spending may adversely impact our business.

Our business depends on the overall demand for information technology and on the economic health of our current and prospective customers. In addition, the purchase of our products is often discretionary and may involve a significant commitment of capital and other resources. Weak global economic conditions, or a reduction in information technology spending even if economic conditions improve, could adversely impact our business, financial condition and results of operations in a number of ways, including longer sales cycles, lower prices for our products and services, higher default rates among our distributors, reduced unit sales and lower or no growth.

A failure to prevent excess inventories or inventory shortages could result in decreased revenue and gross margins and harm our business.

We purchase products from our manufacturing partner outside of and in advance of reseller or customer orders, which we hold in inventory and resell. There is a risk we may be unable to sell excess products ordered from our manufacturing partner. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results and financial condition. Conversely, if we underestimate demand for our products or if our manufacturing partner fails to supply

 

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products we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to resellers, distributors and customers or cause us to lose sales. These shortages may diminish the loyalty of our channel partners or customers.

The difficulty in forecasting demand also makes it difficult to estimate our future results of operations and financial condition from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance.

A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.

Sales to U.S. and foreign federal, state and local governmental agency customers have accounted for a portion of our revenue in past periods, and we may in the future increase sales to government entities. Sales into government entities are subject to a number of risks. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will complete a sale. Government demand and payment for our products and services may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products. Most of our sales to government entities have been made indirectly through our channel partners. Government entities may have contractual or other legal rights to terminate contracts with our distributors and resellers for convenience or due to a default, and any such termination may adversely impact our future results of operations. Finally, for purchases by the U.S. government, the government may require certain products to be manufactured in the United States and other high cost manufacturing locations, and we may not manufacture all products in locations that meet the requirements of the U.S. government.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

We incorporate encryption technology into our products, and certain of our products are subject to U.S. export controls and may be exported outside the United States only with the required export license through an export license exception or other appropriate government authorizations. If we were to fail to comply with U.S. export control regulations, U.S. Customs regulations, U.S. economic sanctions and other laws, we could be subject to substantial civil and criminal penalties, including fines for the Company and incarceration for responsible employees and managers, and the possible loss of export or import privileges. In addition, if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm and penalties. Complying with export control regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities.

Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products to U.S. embargoed or sanctioned countries, governments and persons. Even though we take precautions to prevent our product from being shipped to U.S. sanctions targets, our products could be shipped to those targets by our channel partners despite such precautions. Any such shipment could have negative consequences including government investigations, penalties and reputational harm. In addition, various countries regulate the import of certain encryption technology, including import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products globally or, in some cases, prevent the export or import of our

 

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products to certain countries, governments or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition and results of operations.

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below expectations of securities analysts and investors, resulting in a decline in our stock price.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities equity, revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, stock-based compensation, long-lived assets and accounting for income taxes.

If we are unable to establish vendor specific objective evidence of fair value for any undelivered element of a software order from a customer, our revenue relating to the entire software order will be deferred and recognized over future periods, which would prevent us from recognizing revenue on a significant portion of our sales in a particular quarter, which could cause our stock price to decline.

In the course of our selling efforts, we typically enter into arrangements that require us to deliver a combination of products and services. We refer to each individual product or service as an “element” of the overall arrangement. These arrangements typically require us to deliver particular elements in a future period. Arrangements that are considered software arrangements, such as when there is no hardware component to the arrangement as is the case when we sell virtual products, follow different, more restrictive accounting requirements than non-software arrangements. As we discuss further in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Revenue Recognition,” if we are unable to determine the vendor specific objective evidence of fair value of any undelivered elements in a software arrangement, then we are required by GAAP to defer revenue from the entire software arrangement rather than just the undelivered elements. If we are required to defer revenue from the entire software arrangement for a significant portion of our sales, our revenue for that quarter could fall below our expectations or those of securities analysts and investors, resulting in a decline in our stock price.

If we fail to comply with environmental requirements, our business, financial condition, operating results and reputation could be adversely affected.

We are subject to various environmental laws and regulations including laws governing the hazardous material content of our products and laws relating to the collection of and recycling of electrical and electronic equipment. Examples of these laws and regulations include the European Union (“EU”) Restrictions of Hazardous Substances Directive (“RoHS”) and the EU Waste Electrical

 

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and Electronic Equipment Directive (“WEEE”) as well as the implementing legislation of the EU member states. Similar laws and regulations have been passed or are pending in China, South Korea, Norway and Japan and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.

The EU RoHS and the similar laws of other jurisdictions ban the use of certain hazardous materials such as lead, mercury and cadmium in the manufacture of electrical equipment, including our products. Currently, the manufacturer of our hardware appliances and major component part suppliers comply with the EU RoHS requirements. However, if there are changes to this or other laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to reengineer our products to use components compatible with these regulations. This reengineering and component substitution could result in additional costs to us or disrupt our operations or logistics.

The WEEE Directive requires electronic goods producers to be responsible for the collection, recycling and treatment of such products. Changes in interpretation of the directive may cause us to incur costs or have additional regulatory requirements to meet in the future in order to comply with this directive, or with any similar laws adopted in other jurisdictions.

Our failure to comply with past, present and future similar laws could result in reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties and other sanctions, which could harm our business and financial condition. We also expect that our products will be affected by new environmental laws and regulations on an ongoing basis. To date, our expenditures for environmental compliance have not had a material impact on our results of operations or cash flows and, although we cannot predict the future impact of such laws or regulations, they will likely result in additional costs and may increase penalties associated with violations or require us to change the content of our products or how they are manufactured, which could have a material adverse affect on our business, operating results and financial condition.

Our success in acquiring and integrating other businesses, products or technologies could impact our financial position.

In order to remain competitive, we may seek to acquire additional businesses, products or technologies. The environment for acquisitions in the markets in which we operate is very competitive and acquisition candidate purchase prices will likely exceed what we would prefer to pay, but may choose to pay in order to make an acquisition. Achieving the anticipated benefits of future acquisitions will depend in part upon whether we can integrate acquired operations, products and technology in a timely and cost-effective manner. The acquisition and integration process is complex, expensive and time consuming, and may cause an interruption of, or loss of momentum in, product development and sales activities and operations of both companies. We may not find suitable acquisition candidates, and acquisitions we complete may be unsuccessful. If we consummate a transaction, we may be unable to integrate and manage acquired products and businesses effectively. If we are unable to effectively execute acquisitions, our business, financial condition and operating results could be adversely affected.

If our customers are not satisfied with our technical support or professional services, they may choose not to purchase our products and services or to renew maintenance contracts, either of which would adversely impact our business and results of operations.

Our business relies on our customers’ satisfaction with the technical support and professional consulting services we provide to support our products. If we fail to provide technical support services that are responsive, satisfy our customers’ expectations and resolve issues that they encounter with our products and services, then they may elect not to purchase or renew annual maintenance and

 

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support contracts and they may choose not to purchase additional products and services from us. Accordingly, our failure to provide satisfactory technical support or professional services could have a material and adverse effect on our business and results of operations.

Changes in our provision for income taxes or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.

We are subject to income taxation in the United States and numerous foreign jurisdictions. Determining our provision for income taxes requires significant management judgment. In addition, our provision for income taxes is subject to volatility and could be adversely affected by many factors, including, among other things, changes to our operating or holding structure, changes in the amounts of earnings in jurisdictions with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities and changes in tax laws. We are subject to ongoing tax examinations in various jurisdictions. Tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. While we regularly assess the likely outcomes of these examinations to determine the adequacy of our provision for income taxes, there can be no assurance that the outcomes of such examinations will not have a material impact on our operating results and cash flows.

Significant judgment is required to determine the recognition and measurement attributes prescribed in Accounting Standards Codification (“ASC”) 740-25 (formerly referred to as Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”). In addition, ASC 740-25 applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes or additional paid-in capital. Further, as a result of certain of our ongoing employment and capital investment actions and commitments, our income in certain countries is subject to reduced tax rates and in some cases is wholly exempt from tax. Our failure to meet these commitments could adversely impact our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our results of operations.

Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by manmade problems such as terrorism.

A significant natural disaster, such as an earthquake, fire or a flood, or a significant power outage could have a material adverse impact on our business, operating results and financial condition. Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. In addition, natural disasters could affect our manufacturing vendors or logistics providers’ ability to perform services such as manufacturing products on a timely basis and assisting with shipments on a timely basis. In the event our service providers’ information technology systems or manufacturing or logistics abilities are hindered by any of the events discussed above, shipments could be delayed, resulting in missing financial targets, such as revenue and shipment targets, for a particular quarter. Further, if a natural disaster occurs in a region from which we derive a significant portion of our revenue, customers in that region may delay or forego purchases of our products, which may materially and adversely impact our results of operations for a particular period. In addition, acts of terrorism could cause disruptions in our business or the business of our manufacturer, logistics providers, partners, customers or the economy as a whole. Given our typical concentration of sales at each quarter end, any disruption in the business of our manufacturer, logistics providers, partners or customers that impacts sales at the end of our quarter could have a significant adverse impact on our quarterly results. All of the aforementioned risks may be augmented if the disaster recovery plans for

 

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us and our suppliers prove to be inadequate. To the extent that any of the above results in delays or cancellations of customer orders, or the delay in the manufacture, deployment or shipment of our products, our business, financial condition and results of operations would be adversely affected.

Risks Related to this Offering and Ownership of our Common Stock

Market volatility may affect our stock price and the value of your investment

Following the completion of this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been previously traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot predict or control, including:

 

  Ÿ  

announcements of new products, services or technologies, commercial relationships, acquisitions or other events by us or our competitors;

 

  Ÿ  

fluctuations in stock market prices and trading volumes of securities of similar companies;

 

  Ÿ  

general market conditions and overall fluctuations in U.S. equity markets;

 

  Ÿ  

variations in our operating results, or the operating results of our competitors;

 

  Ÿ  

changes in our financial guidance or securities analysts’ estimates of our financial performance;

 

  Ÿ  

changes in accounting principles;

 

  Ÿ  

sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

 

  Ÿ  

additions or departures of any of our key personnel;

 

  Ÿ  

announcements related to litigation;

 

  Ÿ  

changing legal or regulatory developments in the United States and other countries; and

 

  Ÿ  

discussion of us or our stock price by the financial press and in online investor communities.

In addition, the stock market in general, and the New York Stock Exchange in particular, have experienced substantial price and volume volatility that is often seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may cause the trading price of our common stock to decline. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its common stock. We may become involved in this type of litigation in the future. Any securities litigation claims brought against us could result in substantial expenses and the diversion of our management’s attention from our business.

An active trading market for our common stock may never develop or be sustained.

We have submitted an application to have our common stock listed on the New York Stock Exchange under the symbol “IMPV.” However, we cannot assure you that our common stock will be approved for listing on the New York Stock Exchange or, if approved, that an active trading market for our common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our common stock will develop or be maintained, the liquidity of any trading market, your ability to sell your shares of common stock when desired or the prices that you may obtain for your shares.

 

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Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion over the use of our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. We expect to use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures, which may in the future include investments in, or acquisitions of, businesses, services or technologies that management deems to likely be complementary. In addition, we will invest $3.5 million of the net proceeds to us from this offering in Incapsula, our majority owned subsidiary. Because of the number and variability of factors that will determine our use of the proceeds from this offering, their ultimate use may vary substantially from their currently intended use. As such, our management could spend the proceeds in ways that do not necessarily improve our operating results or enhance the value of our common stock. For a further description of our intended use of the proceeds of the offering, see the section entitled “Use of Proceeds.”

Our disclosure controls and procedures and our internal control over financial reporting may fail to adequately allow us to report information accurately to investors or to detect and prevent errors or fraud, and any failure of such controls and procedures could damage investor confidence in us, cause the market price of our common stock to decline and materially and adversely impact our business, financial condition and operating results.

We cannot assure you that our disclosure controls and procedures, or our internal control over financial reporting, will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of meeting control system objectives. The design of a control system must also reflect applicable resource constraints, and we must consider the control system benefits relative to their costs. As a result of these inherent limitations, no evaluation of controls can provide absolute assurance that we have identified or will identify or prevent all control issues and instances of errors or fraud, if any, within our company. The failure of our control systems to allow us to accurately report information or detect or prevent errors or fraud could damage investor confidence in us, cause the market price of our common stock to decline, and materially adversely impact our business, financial condition and operating results.

In addition, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an unqualified opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.

Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products could reduce our ability to compete and could harm our business.

We expect that our existing cash and cash equivalents, together with our net proceeds from this offering, will be sufficient to meet our anticipated cash needs for at least the next twelve months. After that, we may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our stockholders may

 

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experience significant dilution of their ownership interests and the per share value of our common stock could decline. Furthermore, if we engage in debt financing, the holders of debt would have priority over the holders of common stock and we may be required to accept terms that restrict our ability to incur additional indebtedness, make capital expenditures and take other actions that would otherwise be in the interests of the stockholders and force us to maintain specified liquidity or other ratios, any of which could harm our business, operating results and financial condition. Similarly, if we raise additional funds through collaboration, strategic alliance and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or grant licenses on terms that are not favorable to us. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

 

  Ÿ  

develop or enhance our products and services;

 

  Ÿ  

continue to expand our sales and marketing and research and development organizations;

 

  Ÿ  

acquire complementary technologies, products or businesses;

 

  Ÿ  

expand operations, in the United States or internationally;

 

  Ÿ  

hire, train and retain employees; or

 

  Ÿ  

respond to competitive pressures or unanticipated working capital requirements.

Our failure to do any of these things could seriously harm our business, financial condition and results of operations.

Concentration of ownership among our existing executive officers, directors and their affiliates may prevent new investors from influencing significant corporate decisions.

Upon completion of this offering and assuming the purchase of an aggregate of approximately $15,000,000 of our common stock in this offering by certain of our existing investors, our executive officers, directors and 5% or greater stockholders will beneficially own, in the aggregate, approximately 67.7% of our outstanding common stock. As a result, such persons, acting together, will have the ability to control our management and affairs and substantially all matters submitted to our stockholders for approval, including the election and removal of directors and approval of any significant transaction. These persons will also have the ability to control our management and business affairs. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.

Participation in this offering by certain of our existing stockholders would reduce the available public float for our shares.

Certain entities associated with Accel Partners, Greylock Partners, Meritech Capital Partners, U.S. Venture Partners and Venrock and Shlomo Kramer, our President and Chief Executive Officer, each of which are our existing stockholders, have indicated an interest in purchasing up to an aggregate of approximately $15,000,000 of our common stock in this offering at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, these existing stockholders may elect not to purchase shares in this offering or the underwriters may elect not to sell any shares in this offering to such stockholders. Assuming an initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, if such stockholders were to purchase the entire $15,000,000 of our common stock, they would purchase an aggregate of 1,000,000 shares of our common stock in this offering. If such stockholders were to purchase all of these shares, they would beneficially own approximately 64.8% of our outstanding common stock after this offering.

 

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If our stockholders are allocated all or a portion of the shares in which they have indicated an interest in this offering and purchase any such shares, such purchase would reduce the available public float for our shares because such stockholders would be restricted from selling the shares by a lock-up agreement they have entered into with our underwriters and by restrictions under applicable securities laws. As a result, any purchase of shares by such stockholders in this offering may reduce the liquidity of our common stock relative to what it would have been had these shares been purchased by investors that were not affiliated with us.

Future sales of shares by existing stockholders could cause our stock price to decline.

Upon completion of this offering, there will be 22,101,695 shares of our common stock outstanding. Of these, 5,000,000 shares are being sold in this offering (or 5,750,000 shares, if the underwriters exercise their option to purchase additional shares in full). Assuming the purchase of 1,000,000 shares in this offering by our existing stockholders, only 4,342,704 shares will be freely tradable immediately after this offering (except for shares purchased by affiliates) and 16,416,287 of the remaining 16,758,991 outstanding shares may be sold upon expiration of lock-up agreements 180 days after the date of this prospectus (subject in some cases to volume limitations). In addition, as of September 30, 2011, we had outstanding options to purchase 2,944,899 shares of common stock that, if exercised, will result in these additional shares becoming available for sale upon expiration of the lock-up agreements. A large portion of these shares and options are held by a small number of persons and investment funds. Sales by these stockholders or optionholders of a substantial number of shares after this offering could significantly reduce the market price of our common stock. Moreover, certain holders of shares of common stock will have rights, subject to some conditions, to require us to file registration statements covering the shares they currently hold, or to include these shares in registration statements that we may file for ourselves or other stockholders.

We also intend to register all common stock that we may issue under our 2003 Stock Plan, as amended, our 2011 Stock Option and Incentive Plan (“2011 Plan”) and our 2011 Employee Stock Purchase Plan (“ESPP”). Effective upon the completion of this offering, an aggregate of 1,000,000 shares of our common stock will be reserved for future issuance under the 2011 Plan, plus any shares which are forfeited, cancelled or terminated (other than by exercise) under our 2003 Stock Plan, and an aggregate of 500,000 shares will be reserved for issuance under the ESPP. Once we register these shares, which we plan to do shortly after the completion of this offering, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock. See the section entitled “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If we do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

 

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We will incur increased costs and demands upon management as a result of efforts to comply with the laws and regulations affecting public companies which could adversely affect our operating results.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. These requirements include compliance with the Sarbanes-Oxley Act as well as other rules implemented by the SEC and the New York Stock Exchange. The expenses incurred by public companies for reporting and corporate governance purposes are significant. We expect these rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers. The increased costs associated with operating as a public company will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations.

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.

We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the value of their stock.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include:

 

  Ÿ  

authorizing “blank check” preferred stock, which could be issued by the board without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock, which would increase the number of outstanding shares and could thwart a takeover attempt;

 

  Ÿ  

a classified board of directors whose members can only be dismissed for cause;

 

  Ÿ  

the prohibition on actions by written consent of our stockholders;

 

  Ÿ  

the limitation on who may call a special meeting of stockholders;

 

  Ÿ  

the establishment of advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings; and

 

  Ÿ  

the requirement of at least 75% of the outstanding capital stock to amend any of the foregoing second through fifth provisions.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe

 

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these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

Our ability to use our net operating loss carryforwards may be subject to limitation and may result in increased future tax liability to us.

Generally, a change of more than 50% in the ownership of a corporation’s stock, by value, over a three-year period constitutes an ownership change for U.S. federal income tax purposes. An ownership change may limit a company’s ability to use its net operating loss carryforwards attributable to the period prior to such change. We have not performed a detailed analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code has occurred after each of our previous private placements of preferred stock. In addition, the number of shares of common stock that we issue in connection with this offering may be sufficient, taking into account prior or future shifts in our ownership over a three-year period, to cause us to undergo an ownership change. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liability to us.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. You can generally identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions that concern our expectations, strategy, plans or intentions. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled “Risk Factors” and elsewhere in this prospectus. Accordingly, you should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those projected in the forward looking statements. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

  Ÿ  

our expectations related to the use of proceeds from this offering;

 

  Ÿ  

expected growth in the markets for data security products;

 

  Ÿ  

our ability to anticipate market needs and opportunities and expand our distribution channels;

 

  Ÿ  

our ability to compete with other companies that are developing or selling products that are competitive with our products;

 

  Ÿ  

our plans to continue to invest in and develop technology and products for our markets;

 

  Ÿ  

our expectations regarding expenditures;

 

  Ÿ  

our ability to acquire and integrate new businesses and technologies;

 

  Ÿ  

the timing of expected introductions of new or enhanced products;

 

  Ÿ  

our ability to attract and retain key personnel; and

 

  Ÿ  

other factors discussed elsewhere in this prospectus.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this prospectus may not occur.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

This prospectus also contains statistical data, estimates and forecasts that are based on independent industry publications or other publicly available information, while other information is based on our internal sources. Although we believe that these third-party sources referred to in this

 

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prospectus are reliable, neither we nor the underwriters have independently verified the information provided by these third parties. While we are not aware of any misstatements regarding any third party information presented in this prospectus, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under the section entitled “Risk Factors.”

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $61.8 million, based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares from us is exercised in full, we estimate that we will receive additional net proceeds of $10.5 million. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.

A $1.00 increase or decrease in the assumed initial public offering price of $15.00 would increase or decrease the net proceeds we received from the offering by approximately $4.4 million, assuming the number of shares offered by us remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets.

We currently intend to use the net proceeds received by us from this offering for working capital and general corporate purposes. In addition, we will invest $3.5 million of the net proceeds to us from this offering in Incapsula, our majority owned subsidiary, and will receive in exchange an additional 4,375,000 shares of Incapsula’s Series A-1 Preferred Stock. For a more complete description of our additional investment in Incapsula, see the section entitled “Certain Relationships and Related Person Transactions—Transactions with our Executive Officers, Directors and Beneficial Owners—Transactions with Incapsula, Inc.”

We may also use a portion of the net proceeds received by us from this offering for acquisitions of complementary businesses, technologies or other assets. We have not entered into any agreements with respect to any acquisitions at this time.

We cannot specify with certainty the particular uses for the net proceeds to be received by us from this offering. Accordingly, our management team will have broad discretion in using the net proceeds to be received by us from this offering.

Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on a number of factors, including our earnings, capital requirements and overall financial conditions. The loan agreement for our credit facility contains a prohibition on the payment of cash dividends.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments and capitalization as of September 30, 2011, as follows:

 

  Ÿ  

our actual cash, cash equivalents and short-term investments and capitalization;

 

  Ÿ  

our pro forma cash, cash equivalents and short-term investments and capitalization after giving effect to the conversion of all outstanding shares of our convertible preferred stock into 10,761,511 shares of common stock, which we expect to occur immediately prior to the closing of this offering, and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital; and

 

  Ÿ  

our pro forma as adjusted cash, cash equivalents and short-term investments and capitalization after giving effect to (i) the conversion of all outstanding shares of our convertible preferred stock into 10,761,511 shares of common stock, which we expect to occur immediately prior to the closing of this offering, the resulting reclassification of the preferred stock warrant liability to additional paid-in capital, and (ii) the receipt of the net proceeds from the sale of 4,750,000 shares of common stock offered by us in this offering, at an assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table in conjunction with the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of September 30, 2011  
     Actual     Pro Forma     Pro Forma as
Adjusted
 
     (in thousands, except share and per share data)  

Cash, cash equivalents and short-term investments

   $ 13,025      $ 13,025      $ 77,590   
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock warrant liability

   $ 223      $ —        $ —     

Convertible preferred stock, $0.0001 par value, per share: 21,566,101 shares authorized, 10,761,511 shares issued and outstanding actual; no shares authorized, issued and outstanding pro forma and pro forma as adjusted

     53,442        —          —     

Stockholders’ equity (deficit):

      

Common stock, $0.0001, per share: 50,000,000 shares authorized, 6,590,184 shares issued and outstanding actual; 17,351,695 shares issued and outstanding pro forma (unaudited); 145,000,000 shares authorized, 22,101,695 shares issued and outstanding pro forma as adjusted

     1        2        2   

Additional paid-in capital

     5,577        59,241        121,004   

Accumulated deficit

     (64,634     (64,634     (64,634

Accumulated other comprehensive income

     (360     (360     (360

Noncontrolling interest

     (642     (642     (642
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (60,058     (6,393     55,370   
  

 

 

   

 

 

   

 

 

 

Total capitalization (capital deficiency)

   $ (6,393   $ (6,393   $ 55,370   
  

 

 

   

 

 

   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this

 

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prospectus, would increase (decrease) our pro forma as adjusted cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $4.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) our pro forma as adjusted cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization from this offering by approximately $14.0 million, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of common stock issued and outstanding actual, pro forma and pro forma as adjusted in the table above excludes the following shares:

 

  Ÿ  

2,944,899 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2011, and having a weighted average exercise price of $3.48 per share;

 

  Ÿ  

19,999 shares of common stock issuable upon the exercise of two outstanding warrants to purchase convertible preferred stock, assuming the conversion immediately prior to the closing of this offering, at a weighted average exercise price of $3.00 per share;

 

  Ÿ  

1,929,152 shares of common stock reserved for future issuance under our equity incentive plans; and

 

  Ÿ  

500,000 shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted immediately to the extent of the difference between the initial offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our pro forma net tangible book deficit as of September 30, 2011 was $(6.4) million, or $(0.37) per share of common stock. Pro forma net tangible book deficit per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding, as of September 30, 2011, after giving effect to the conversion of all outstanding shares of our convertible preferred stock into 10,761,511 shares of our common stock, which we expect to occur immediately prior to the closing of this offering, and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital.

After giving effect to the sale by us of 4,750,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2011 would have been approximately $55.4 million, or approximately $2.51 per share. This amount represents an immediate increase in pro forma net tangible book value of $2.88 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $12.49 per share to new investors purchasing shares of common stock in this offering at the assumed initial public offering price.

The following table illustrates this dilution:

 

Assumed initial public offering price per share

     $ 15.00   

Pro forma net tangible book deficit per share as of September 30, 2011

   $ (0.37  

Increase per share attributable to this offering

     2.88     
  

 

 

   

Pro forma net tangible book value per share after this offering

       2.51   
    

 

 

 

Dilution per share to new investors

     $ 12.49   
    

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) our adjusted net tangible book value per share after this offering by approximately $0.20 and would increase (decrease) dilution per share to new investors by approximately $0.80, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. In addition, to the extent any outstanding options or warrants are exercised, you will experience further dilution.

 

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The following table presents on a pro forma as adjusted basis after giving effect to the conversion of all outstanding shares of convertible preferred stock into common stock, which we expect to occur immediately prior to the closing of this offering, the difference between existing stockholders and new investors purchasing shares of our common stock in this offering, with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of common and convertible preferred stock, cash received from the exercise of stock options and the value of any stock issued for services and the average price per share paid or to be paid to us at an assumed offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
       Number      Percent     Amount      Percent    

Existing stockholders

     17,351,695         78.5   $ 59,251,000         45.4   $ 3.41   

New investors

     4,750,000         21.5        71,250,000         54.6        15.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     22,101,695         100   $ 130,501,272         100   $ 5.90   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the total consideration paid by new investors by $4.8 million and increase (decrease) the percent of total consideration paid by new investors by 1.6%, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Assuming the underwriters’ option to purchase additional shares is exercised in full and if certain of our existing stockholders do not elect to purchase an aggregate of approximately $15,000,000 of our common stock in this offering, sales by us in this offering will reduce the percentage of shares held by existing stockholders to 75.9% and will increase the number of shares held by our new investors to 5,500,000, or 24.1%.

The number of shares of our common stock to be outstanding after this offering is based on 17,351,695 shares of our common stock outstanding as of September 30, 2011 and excludes:

 

  Ÿ  

2,944,899 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2011, and having a weighted average exercise price of $3.48 per share;

 

  Ÿ  

19,999 shares of common stock issuable upon the exercise of two outstanding warrants to purchase convertible preferred stock, assuming the conversion immediately prior to the closing of this offering, at a weighted average exercise price of $3.00 per share;

 

  Ÿ  

1,929,152 shares of common stock reserved for future issuance under our equity incentive plans; and

 

  Ÿ  

500,000 shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010 and the consolidated balance sheet data as of December 31, 2009 and 2010 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the nine months ended September 30, 2010 and 2011 and the consolidated balance sheet data as of September 30, 2011 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the years ended December 31, 2006 and 2007 and the consolidated balance sheet data as of December 31, 2006, 2007 and 2008 are unaudited. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results for the nine months ended September 30, 2011 are not necessarily indicative of operating results to be expected for the full year ending December 31, 2011 or any other period. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of those unaudited consolidated financial statements. You should read the selected consolidated financial data below in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, related notes and other financial information included elsewhere in this prospectus.

 

    Years Ended December 31,     Nine Months Ended
September 30,
 
    2006     2007     2008     2009     2010     2010     2011  
    (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

             

Net revenue:

             

Products and license

  $ 8,635      $ 13,995      $ 24,298      $ 25,727      $ 34,479      $ 23,532      $ 32,821   

Services

    1,776        3,713        7,848        13,614        20,903        14,866        22,166   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    10,411        17,708        32,146        39,341        55,382        38,398        54,987   

Cost of revenue:(1)

             

Products and license

    1,877        2,379        3,661        4,795        5,905        4,123        4,433   

Services

    395        1,659        3,455        4,576        6,428        4,639        7,062   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    2,272        4,038        7,116        9,371        12,333        8,762        11,495   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    8,139        13,670        25,030        29,970        43,049        29,636        43,492   

Operating expenses:

             

Research and development(1)

    3,037        4,899        8,591        10,538        13,214        9,468        12,858   

Sales and marketing(1)

    8,223        14,505        20,447        26,920        34,168        24,095        30,970   

General and administrative(1)

    896        1,811        3,608        4,669        7,982        5,292        8,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    12,156        21,215        32,646        42,127        55,364        38,855        52,014   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (4,017     (7,545     (7,616     (12,157     (12,315     (9,219     (8,522

Other income (expense), net

    573        522        190        178        474        357        (238
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (3,444     (7,023     (7,426     (11,979     (11,841     (8,862     (8,760

Provision for income taxes

    —          106        229        360        527        331        471   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (3,444     (7,129     (7,655     (12,339     (12,368     (9,193     (9,231

Loss attributable to noncontrolling interest

    —          —          —          43        355        256        458   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Imperva, Inc. stockholders

  $ (3,444   $ (7,129   $ (7,655   $ (12,296   $ (12,013   $ (8,937   $ (8,773
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock attributable to Imperva, Inc. stockholders, basic and diluted(2)

  $ (1.03   $ (1.94   $ (1.98   $ (2.82   $ (2.46   $ (1.84   $ (1.64
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net loss per share of common stock, basic and diluted(2)

    3,328,810        3,678,378        3,860,033        4,365,359        4,884,665        4,846,160        5,334,581   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share of common stock attributable to Imperva, Inc. stockholders, basic and diluted(2)

          $ (0.77     $ (0.54
         

 

 

     

 

 

 

Shares used in computing pro forma net loss per share of common stock, basic and diluted(2)

            15,646,176          16,096,092   
         

 

 

     

 

 

 

 

 

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(1) Includes stock-based compensation as follows:

 

     Years Ended December 31,      Nine Months
Ended September 30,
 
     2006      2007      2008      2009      2010      2010      2011  
     (dollars in thousands)  

Cost of revenue

   $ 3       $ 8       $ 22       $ 37       $ 44       $ 28       $ 73   

Research and development

     21         33         41         57         66         37         83   

Sales and marketing

     71         153         163         218         257         191         245   

General and administrative

     24         25         48         109         273         60         753   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 119       $ 219       $ 274       $ 421       $ 640       $ 316       $ 1,154   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Please see Note 17 to our audited consolidated financial statements appearing elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per share of common stock and pro forma net loss per share of common stock.

 

     Years Ended December 31,     As of
September 30,

2011
 
     2006     2007     2008     2009     2010    
     (dollars in thousands)  

Consolidated Balance Sheet Data:

            

Cash, cash equivalents and short term investments

   $ 16,557      $ 11,628      $ 24,949      $ 19,050      $ 17,655      $ 13,025   

Working capital (deficiency)

     16,182        10,528        22,892        11,317        6,841        (5,761

Total assets

     19,953        20,343        38,535        37,546        40,977        42,465   

Deferred revenue, current and long-term

     930        5,046        8,060        13,377        21,218        25,560   

Long-term debt, including current portion

     36        38        —          600        —          —     

Convertible preferred stock warrant liability

     55        55        55        55        69        223   

Convertible preferred stock

     33,464        33,464        53,442        53,442        53,442        53,442   

Noncontrolling interest

     —          —          —          (43     (351     (642

Total stockholders’ deficit

     (16,378     (23,027     (30,072     (41,528     (52,419     (60,058

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the forward-looking statements below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” and elsewhere in this prospectus.

Overview

We are a pioneer and leader of a new category of data security solutions focused on providing visibility and control over high-value business data across critical business systems within the data center. Our SecureSphere Data Security Suite is a broad solution designed to prioritize and mitigate risks to high-value business data, protect against hackers and malicious insiders, and address and streamline regulatory compliance. SecureSphere is an integrated, modular suite, which provides database, file and web application security, and secures all business data across various systems in data centers, including traditional on-premise data centers as well as private, public and hybrid cloud computing environments. We also offer cloud-based security services that deliver on-demand and cost effective web application security.

We were founded in 2002 with the vision of protecting high-value business data within the enterprise. Since that time we have been investing in our data security products to meet the rapidly evolving demands of customers. We shipped our initial web application security and data security products in 2002; in 2006, we expanded our database security product to include compliance features; and in 2010, we launched our file security offering. In addition, in 2010, we launched our cloud-based initiatives with ThreatRadar and, in 2011, we introduced our cloud-based offering for mid-market enterprises and small and medium-sized businesses (“SMB”) that we provide through Incapsula, Inc., our majority owned subsidiary.

Our research and development efforts are focused primarily on improving and enhancing our existing data security products and services, as well as developing new products and services and conducting advanced security research. We conduct our research and development activities in Israel, and we believe this provides us with access to some of the best engineering talent in the security industry. As of September 30, 2011, we had 134 employees dedicated to research and development, including our advanced security research group, the Application Defense Center (“ADC”). Our research and development expense was $8.6 million, $10.5 million and $13.2 million for 2008, 2009 and 2010, respectively, and $12.9 million during the nine months ended September 30, 2011.

We derive our revenue from sales and licenses of our products and sales of our services. Products and license revenue is generated primarily from sales of perpetual software licenses installed on hardware appliances or virtual appliances for our SecureSphere Data Security Suite. Services revenue consists of maintenance and support, professional services and training and subscriptions. A majority of our revenue is derived from customers in the Americas region. In 2010, 66% of our total revenue was generated from the Americas, 24% from Europe, Middle East and Africa (“EMEA”) and 10% from Asia Pacific, and for the nine months ended September 30, 2011, 63% of our total revenue was generated from the Americas, 23% from EMEA and 14% from Asia Pacific.

We market and sell our products through a hybrid sales model, which combines a direct touch sales organization and an overlay channel sales team that actively assist our extensive network of

 

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channel partners throughout the sales process. We also provide our channel partners with marketing assistance, technical training and support. We primarily sell our products and services through our channel partners, including distributors and resellers, which sell to end-user customers, who we refer to in this prospectus as our customers. We have a network of over 350 channel partners worldwide, including both resellers and distributors. In 2010, our channel partners originated over 60%, and fulfilled almost 90%, of our sales. We work with many of the world’s leading security value-added resellers, and our partners include some of the largest hosting companies for cloud-based deployments.

As of September 30, 2011, we had over 1,500 customers in more than 50 countries. In addition, our solutions are used to protect thousands of organizations through cloud-based deployments with our Software-as-a-Service (“SaaS”) customers and our managed security service provider (“MSSP”) and hosting partners. Our customers include four of the top five telecommunications companies, three of the top five commercial banks in the United States, three of the top five financial data service firms, three of the top five computer hardware companies, two of the top five food and drug store companies, over 150 government agencies around the world and more than 100 Fortune 1000 companies.

Our net revenue has increased in each of the last three years, growing from $32.1 million in 2008 to $55.4 million in 2010. Our net revenue has also grown from $38.4 million during the nine months ended September 30, 2010 to $55.0 million during the nine months ended September 30, 2011. We have incurred net losses attributable to our stockholders of $7.7 million, $12.3 million and $12.0 million in 2008, 2009 and 2010, respectively, and $8.8 million during the nine months ended September 30, 2011. As of September 30, 2011, we had an accumulated deficit of $64.6 million.

Opportunities, Challenges and Risks

We believe that the growth of our business and our future success are dependent upon many factors, including our ability to maintain our technology leadership, improve our sales and marketing, address the needs of smaller enterprises and compete effectively in the marketplace for data security solutions. While each of these areas presents significant opportunities for us, they also pose important challenges and risks that we must successfully address in order to sustain the growth of our business and improve our results of operations.

Maintain Technology Leadership.     As a result of the rise in sophisticated attacks by hackers and malicious insiders, the difficulty in complying with regulations governing business data and the growing complexity of, and open access to, data centers, we believe that enterprises are struggling to provide visibility and control over business data that they need to protect. We believe these challenges are driving the need for a new protection layer positioned closely around business data and systems in the data center. We expect that as enterprises recognize the growing risk to high-value business data and the need to comply with increasing regulatory compliance mandates, their spending will increase on solutions designed to control and protect such data. We believe that traditional security and compliance products do not address the evolving needs of enterprises or do not do so adequately, and that this presents us with a large market opportunity. To capitalize on this opportunity, we have introduced and expect that in the future we will need to continue to introduce innovations to our broad data security solutions. We cannot assure you that our products will achieve widespread market acceptance or that we will properly anticipate future customer needs. Moreover, if our products do not satisfy evolving customer requirements, we will not capture the increase in spending that we expect will result from enterprises seeking to secure business data and systems.

Invest in Sales and Marketing .    In order to capitalize on the anticipated increase in spending in the data security market, we will need to continue to invest significant resources to further strengthen our existing relationships with channel partners, extend our global network by adding new channel

 

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partners and grow our sales and marketing team. Any investments that we make in our sales and marketing will occur in advance of our experiencing any benefits from such investments, and so it may be difficult for us to determine if we are efficiently allocating our resources in this area. We cannot assure you that the investments that we intend to make to strengthen our sales and marketing efforts will enable us to capitalize on the expected increase in spending in the data security market or result in an increase in revenue or an improvement in our results of operations.

Address Needs of Smaller Enterprises .    As market awareness of the benefits of a broad data security solution increases, we believe there is a significant opportunity to provide data security solutions to smaller enterprises as they confront increasing security threats and compliance mandates. To capitalize on this opportunity, we intend to increase our business with mid-market enterprises and SMBs by expanding our cloud-based service offerings and our distribution channel. We have made, and may in the future continue to make, significant investments in our cloud-based security products to address the data security needs of mid-market enterprises and SMBs. If our cloud-based security products, which are relatively new, fail to gain broad acceptance with mid-market enterprises and SMBs, our revenue growth, results of operations and competitive position in our industry could suffer.

Compete Effectively .    We operate in an intensely competitive market that has witnessed significant consolidation in recent years with large companies acquiring many of our competitors. We track our success rate in competitive sales opportunities against certain competitors, some of which generate higher revenues and have greater market capitalizations than we do, and many of which are more established or have greater name recognition within our industry. Based upon our internal tracking of the results of such competitive sales opportunities, we believe that we have historically competed favorably against our larger competitors, and that we have a proven track record of successfully competing against such larger competitors. Nonetheless, some of our larger competitors have numerous advantages, including, but not limited to, greater financial resources, broader product offerings and more established relationships with channel partners and customers. If we are unable to compete effectively for a share of the data security market, our business, results of operations and financial condition could be materially and adversely affected.

To date, we have incurred, and continue to incur, losses from operations and net losses. However, we believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Further, we expect that, if we successfully execute our business plan and strategy, our loss from operations and our net losses will continue to decline, and that we will reach profitability. Should we need additional cash in the future, we may utilize existing lines of credit, enter into additional lines of credit or raise funds through the sale of equity securities.

Key Metrics of Our Business

We monitor the key financial metrics discussed below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies.

Net Revenue :    We measure our net revenue to assess the acceptance of our products from our customers, our growth in the markets we serve and to help us establish our strategic and operating plans for future periods. We discuss the components of our net revenue in “—Financial Overview— Net Revenue” below.

Gross Margin :    We monitor our gross margin to assess the impact on our current and forecasted financial results from any changes to the pricing and mix of products we are selling to our customers.

Loss from Operations :    We track our loss from operations to assess how effectively we are planning and monitoring our operations as well as controlling our operational costs, which are primarily driven by headcount.

 

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Cash, Cash Equivalents and Short-term Investments :    We evaluate the level of our cash, cash equivalents and short-term investments to ensure we have sufficient liquidity to fund our operations, including the development of future products and product enhancements and the expansion into new sales channels and territories.

Number of Customers :    We believe our customer count is a key indicator of our market penetration, the productivity of our sales organization and the value that our products bring to our customer base. We also believe our existing customers represent significant future revenue opportunities for us.

We discuss for the periods presented revenue, gross margin, the components of loss from operations and number of customers further below under “—Segments” and “—Results of Operations”, as applicable, and we discuss our cash and cash equivalents under “—Liquidity and Capital Resources.”

We also believe that deferred revenue and cash flow from operations are key financial metrics for our business. The components of deferred revenue and cash flow from operations, as well as our rationale for monitoring these metrics, are discussed immediately below this table:

 

    Years Ended or as of
December 31,
    Nine Months Ended or as of
September 30,
 
    2008     2009     2010     2010     2011  
    (dollars in thousands)  

Net revenue

  $ 32,146      $ 39,341      $ 55,382      $ 38,398      $ 54,987   

Gross margin

    77.9 %     76.2     77.7 %     77.2     79.1

Loss from operations

    (7,616     (12,157     (12,315     (9,219     (8,522

Total deferred revenue

    8,060        13,377        21,218        16,752        25,560   

Cash, cash equivalents and short-term investments

    24,949        19,050        17,655        17,543        13,025   

Net cash used in operations

    (5,164     (5,511     (1,049     (831     (5,056

Number of customers

    587        926        1,309        1,181        1,584   

Deferred Revenue

Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue. The majority of our deferred revenue balance consists of the unamortized portion of services revenue from maintenance and support contracts. We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods. We also assess the increase in our deferred revenue balance plus revenue we recognized in a particular period as a measure of our sales activity for that period. While the change in our deferred revenue and revenue recognized in a given period comprise the majority of our sales activity during that period, they do not constitute the entire sales activity during the period. Our total sales activity also includes sales of products and services for which we have not yet met the criteria to recognize revenue or add such amounts to our deferred revenue balance. Revenue and deferred revenue from these transactions is recognized or recorded in future periods when we have met the required criteria. We discuss for the periods presented deferred revenue further below under “—Results of Operations.”

Net Cash Flow Provided By (Used in) Operations

We monitor cash flow from operations as a measure of our overall business performance. Our cash flow from operations is driven primarily by sales of our products and licenses and, to a lesser

 

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extent, from up-front payments from customers under maintenance and support contracts. Our primary uses of cash in operating activities are for personnel-related expenditures, costs of acquiring the hardware used for our appliances, marketing and promotional expenses and costs related to our facilities. Monitoring cash flow from operations enables us to analyze our financial performance without the non-cash effects of certain items such as depreciation and amortization and stock-based compensation expenses, thereby allowing us to better understand and manage the cash needs of our business.

Segments

For financial reporting purposes, we operate as two reportable business segments: (i) Imperva, which is comprised of our financial position and results of operations and those of our wholly-owned subsidiaries; and (ii) Incapsula, which is comprised entirely of the financial position and results of operations of our majority owned subsidiary. Our Incapsula segment commenced operations in November 2009 and has not generated any significant revenue since inception. In discussing our results of operations, we have provided a consolidated discussion and analysis of the revenues from our two segments and, where significant, provided a separate discussion and analysis of the operating expenses of our two segments. See Note 16 of “Notes to Consolidated Financial Statements” for a discussion of our financial information by segment.

Financial Overview

Net Revenue

We derive our revenue from sales and licenses of our products and sales of our services. As discussed further in “—Critical Accounting Policies and Estimates—Revenue Recognition” below, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is probable.

Our net revenue is comprised of the following:

 

  Ÿ  

Products and License Revenue —Product and license revenue is generated from sales of perpetual software licenses installed on hardware appliances or virtual appliances for our SecureSphere Data Security Suite. Our SecureSphere Data Security Suite consists of database security, file security and web application security. We offer multiple hardware appliance versions that accompany our software, each with different throughput capacities. Perpetual software license revenue is generated from sales of our appliances, licenses for additional users and add-on software modules. We also generate a small amount of hardware revenue from sales of spares or replacement appliances, demonstration units and accessories.

 

  Ÿ  

Services Revenue— Services revenue consists of maintenance and support, professional services and training and subscriptions. Maintenance and support revenue is generated from support services that are bundled with appliances and add-on software modules. There are three levels of maintenance and support—Standard, Enhanced and Premium—and these are offered through agreements for 1-year, 2-year or 3-year terms. Maintenance and support includes major and minor if-and-when available software updates; customer care, which includes our designated support engineer program; content updates from our advanced security research group, the ADC, and hardware replacement. Subscription revenue is generated from sales of our cloud-based services. Professional services revenue consists of fees we earn related to implementation and consulting services we provide our customers. Training services revenue consists of fees we earn related to training customers and partners on the use of our products. We expect that the services revenue from maintenance and support contracts will continue to grow along with the increase in the size of our installed base.

 

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Most of our products and services are sold to customers in the Americas, primarily in the U.S., however, a significant portion of our revenue is generated from international sales. See Note 16 of “Notes to Consolidated Financial Statements” for a discussion of our financial information by geographic region. Our revenue by geographic region is as follows:

 

     Years Ended December 31,      Nine Months Ended September 30,  
         2008          2009          2010                  2010                      2011          

Americas

   $ 21,770       $ 24,869       $ 36,586       $ 25,519       $ 34,316   

EMEA

     6,706         9,929         13,492         9,085         12,805   

Asia Pacific

     3,670         4,543         5,304         3,794         7,866   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,146       $ 39,341       $ 55,382       $ 38,398       $ 54,987   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cost of Revenue

Our total cost of revenue is comprised of the following:

 

  Ÿ  

Cost of Products and License Revenue —Cost of products and license revenue is comprised primarily of third-party hardware costs and royalty fees. Our cost of products and license revenue also includes personnel costs related to our operations team, shipping costs and write-offs for excess and obsolete inventory.

 

  Ÿ  

Cost of Services Revenue —Cost of services revenue is primarily comprised of personnel costs of our technical support team, our professional consulting services and training teams and our Security Operations Center (“SOC”) team. Cost of services revenue also includes facilities costs, subscription fees and depreciation. We expect that our cost of services revenue will increase in absolute dollars as we increase our headcount.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing and general and administrative expenses. Personnel costs are the most significant component of our operating expenses and consist of wages, benefits and bonuses and, with regard to the sales and marketing expense, sales commissions. Personnel costs also include stock-based compensation. We expect personnel costs to continue to increase in absolute dollars as we hire new employees to continue to grow our business. While our operating expenses have grown on an absolute basis each year, they have decreased as a percentage of revenue. As a result, our operating margins have improved.

Research and Development

Our research and development is focused on maintaining and improving our existing products and on new product development. A majority of our research and development expenses are comprised of personnel costs and, to a lesser extent, facility costs, hardware prototype costs, laboratory expenses and depreciation. We expense research and development costs as incurred. We expect our research and development expenses to increase in absolute dollars as we continue to enhance our existing products and develop new products and services that address the emerging market for data security and regulatory compliance.

Sales and Marketing

Sales and marketing expense is the largest component of our operating expenses and consists primarily of personnel costs, including commissions and travel expenses. Sales and marketing expenses also include costs related to marketing and promotional activities, third-party referral fees and, to a lesser extent, facilities costs and depreciation. We expect our sales and marketing expenses to increase in absolute dollars as we expand our sales and marketing efforts worldwide.

 

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General and Administrative

General and administrative expense consists primarily of personnel costs as well as professional fees, facilities costs and depreciation. General and administrative personnel costs include our executive, finance, purchasing, order entry, human resources, information technology and legal functions. Our professional fees consist primarily of accounting, external legal, information technology and other consulting costs. We expect that general and administrative expense will increase in absolute dollars to support our growth and following the completion of this offering, as we expect to incur significant additional legal and accounting costs related to compliance with rules and regulations of the Securities and Exchange Commission, including the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and compliance with the rules of the New York Stock Exchange, as well as additional insurance, investor relations and other costs associated with being a public company.

Other Income (Expense), net

Other income (expense), net is comprised of the following items:

 

  Ÿ  

Interest Income— Interest income consists of interest earned on our cash, cash equivalents and short-term investments. We expect interest income will vary each reporting period depending on our average investment balances during the period and market interest rates.

 

  Ÿ  

Interest Expense— Interest expense consists of interest accrued or paid on debt obligations.

 

  Ÿ  

Foreign Currency Forward Contract Gains (Losses) —Foreign currency forward contract gains and losses pertain to the ineffective portion of derivative instruments that we have entered into primarily to manage our exposure to the variability in expected future expenses resulting from changes in foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes. We expect our foreign currency forward contract gains (losses) to continue to fluctuate in the future due to changes in foreign currency exchange rates.

 

  Ÿ  

Foreign Currency Exchange Gains (Losses) —Foreign currency exchange gains and losses relate to transactions denominated in currencies other than the U.S. Dollar.

 

  Ÿ  

Warrant Liability Gain (Losses) —Our outstanding convertible preferred stock warrants are classified as a liability on our consolidated balance sheets and, as such, are remeasured to fair value at each balance sheet date with the corresponding gain or loss from the adjustment recorded as other income (expense), net. We will continue to record adjustments to the fair value of the warrants until they are exercised, automatically converted into warrants to purchase common stock or expire, at which time the warrants will no longer be remeasured at each balance sheet date. Following completion of this offering, our outstanding warrants will automatically convert into warrants to purchase common stock and, upon such conversion, will no longer be classified as a liability on our consolidated balance sheet.

Provision for Income Taxes

We operate in several tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business including the United States and Israel. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to U.S. income tax. To date, we have incurred net losses and have not recorded any U.S. federal or state income tax provisions. Our tax expense to date relates to foreign income taxes, mainly from our Israeli activities.

 

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Results of Operations

The following table is a summary of our consolidated statements of operations in dollars and as a percentage of our total revenue. We have derived the data for the years ended December 31, 2008, 2009 and 2010 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the data for the nine months ended September 30, 2010 and 2011 from our unaudited interim consolidated financial statements included elsewhere in this prospectus.

 

    Years Ended December 31,     Nine Months Ended September 30,  
    2008     2009     2010     2010     2011  
    Amount     % of Net
Revenue
    Amount     % of Net
Revenue
    Amount     % of Net
Revenue
    Amount     % of Net
Revenue
    Amount     % of Net
Revenue
 
    (dollars in thousands)  

Statement of Operations Data:

                   

Net revenue:

                   

Products and license

  $ 24,298        75.6      $ 25,727        65.4      $ 34,479        62.3      $ 23,532        61.3      $ 32,821        59.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Services:

                   

Maintenance and support

    7,192        22.4        11,840        30.1        18,064        32.5        12,916        33.6        17,766        32.3   

Professional services and training

    656        2.0        1,763        4.5        2,465        4.5        1,716        4.5        3,478        6.3   

Subscriptions

    —          0.0        11        0.0        374        0.7        234        0.6        922        1.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total services

    7,848        24.4        13,614        34.6        20,903        37.7        14,866        38.7        22,166        40.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    32,146        100.0        39,341        100.0        55,382        100.0        38,398        100.0        54,987        100.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

                   

Products and license

    3,661        11.4        4,795        12.2        5,905        10.7        4,123        10.7        4,433        8.1   

Services

    3,455        10.7        4,576        11.6        6,428        11.6        4,639        12.1        7,062        12.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    7,116        22.1        9,371        23.8        12,333        22.3        8,762        22.8        11,495        20.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    25,030        77.9        29,970        76.2        43,049        77.7        29,636        77.2        43,492        79.1   

Operating expenses:

                   

Research and development

    8,591        26.7        10,538        26.8        13,214        23.9        9,468        24.7        12,858        23.4   

Sales and marketing

    20,447        63.7        26,920        68.4        34,168        61.7        24,095        62.7        30,970        56.3   

General and administrative

    3,608        11.2        4,669        11.9        7,982        14.4        5,292        13.8        8,186        14.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    32,646        101.6        42,127        107.1        55,364        100.0        38,855        101.2        52,014        94.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (7,616     (23.7     (12,157     (30.9     (12,315     (22.3     (9,219     (24.0     (8,522     (15.5

Other income (expense), net

    190        0.6        178        0.5        474        0.8        357        (0.9     (238     (0.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (7,426     (23.1     (11,979     (30.4     (11,841     (21.5     (8,862     (23.1     (8,760     (15.9

Provision for income taxes

    229        0.7        360        0.9        527        0.8        331        0.9        471        0.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (7,655     (23.8     (12,339     (31.3     (12,368     (22.3     (9,193     (24.0     (9,231     (16.8

Loss attributable to noncontrolling interest

    —          0.0        43        0.1        355        0.6        256        0.7        458        0.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Imperva, Inc. stockholders

  $ (7,655     (23.8   $ (12,296     (31.2   $ (12,013     (21.7   $ (8,937     (23.3   $ (8,773     (16.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Comparison of the Nine Months Ended September 30, 2010 and 2011

Net Revenue

 

     Nine Months Ended September 30,    Change
     2010    2011   
     Amount    % of
Net Revenue
   Amount    % of
Net Revenue
   Amount    %
     (dollars in thousands)

Net revenue by type:

                             

Products and license

     $ 23,532          61.3        $ 32,821          59.7        $ 9,289          39.5  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

Services:

                             

Maintenance and support

       12,916          33.6          17,766          32.3          4,850          37.6  

Professional services and training

       1,716          4.5          3,478          6.3          1,762          102.7  

Subscriptions

       234          0.6          922          1.7          688          294.0  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

Total services

       14,866          38.7          22,166          40.3          7,300          49.1  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

Total net revenue

     $ 38,398          100.0        $ 54,987          100.0        $ 16,589          43.2  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

Net revenue by geographic region:

                             

Americas

     $ 25,519          66.5        $ 34,316          62.4        $ 8,797          34.5  

EMEA

       9,085          23.6          12,805          23.3          3,720          40.9  

Asia Pacific

       3,794          9.9          7,866          14.3          4,072          107.3  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

Total net revenue

     $ 38,398          100.0        $ 54,987          100.0        $ 16,589          43.2  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

Our net revenue increased by $16.6 million, or 43.2%, to $55.0 million during the nine months ended September 30, 2011 from $38.4 million during the nine months ended September 30, 2010 due to growth in products and license revenue and services revenue. This revenue growth reflects the increasing demand for our product and service offerings consistent with our business plan and expectations for growth. The Americas region contributed the largest portion of this growth with a $8.8 million increase, or approximately a 34.5% change over the same period in 2010. In addition, increases in our sales personnel focused on the Asia Pacific region resulted in an increase in revenue in Asia Pacific of $4.1 million, or approximately a 107.3% change over the same period in 2010.

Products and license revenue increased by $9.3 million, or 39.5%, to $32.8 million during the nine months ended September 30, 2011 from $23.5 million during the nine months ended September 30, 2010. The change in product and license revenue was driven by a significant increase in product sales, primarily in the Americas region in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. This increase was due to increased sales volume of our products.

Services revenue increased by $7.3 million, or 49.1%, to $22.2 million during the nine months ended September 30, 2011 from $14.9 million during the nine months ended September 30, 2010. During the nine months ended September 30, 2011, our services revenue was comprised of $17.8 million in maintenance and support, $3.5 million in professional services and training and $0.9 million in subscriptions. The change in services revenue in the nine months ended September 30, 2011 from the nine months ended September 30, 2010 was primarily due to an increase of $4.9 million in maintenance and support revenue resulting from our larger installed base, $1.8 million in professional services and training revenues due primarily to an increase in the number of implementation projects and $0.7 million in subscriptions revenue from our ThreatRadar product, which was launched in the first quarter of 2010.

 

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Gross Profit

 

     Nine Months Ended September 30,        
     2010     2011     %
Change
 
     Amount      Gross
Margin
    Amount      Gross
Margin
   
     (dollars in thousands)        

Products and license gross profit

   $ 19,409         82.5   $ 28,388         86.5     4.0   

Services gross profit

     10,227         68.8     15,104         68.1     (0.7
  

 

 

      

 

 

      

Total gross profit

   $ 29,636         77.2   $ 43,492         79.1     1.9   
  

 

 

      

 

 

      

Total gross margin increased 1.9 percentage points from 77.2% during the nine months ended September 30, 2010 to 79.1% during the nine months ended September 30, 2011 primarily due to an increase in products and license gross margin of 4.0 percentage points in the nine months ended September 30, 2011 compared to the same period in 2010. The change was primarily due to a continued shift in product mix towards higher throughput appliances, which generally have higher gross margins. The 0.7 percentage point decrease in services gross margin was mostly due to higher use of outside contractors, which tend to be more costly than our internal service personnel, in order to support the growth of our services revenue.

Operating Expenses

 

     Nine Months Ended September 30,         
     2010      2011      Change  
     Amount      % of
Net Revenue
     Amount      % of
Net Revenue
     Amount      %  
     (dollars in thousands)  

Operating expenses:

                 

Research and development

   $ 9,468         24.7       $ 12,858         23.4       $ 3,390         35.8   

Sales and marketing

     24,095         62.7         30,970         56.3         6,875         28.5   

General and administrative

     5,292         13.8         8,186         14.5         2,894         54.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 38,855         101.2       $ 52,014         94.2       $ 13,159         33.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Results above include stock-based compensation expense of:

 

     Nine Months
Ended September  30,
     Increase  
         2010              2011         
     (dollars in thousands)  

Research and development

   $ 37       $ 83       $ 46   

Sales and marketing

     191         245         54   

General and administrative

     60         753         693   
  

 

 

    

 

 

    

 

 

 
   $ 288       $ 1,081       $ 793   
  

 

 

    

 

 

    

 

 

 

Research and development expenses increased by $3.4 million, or 35.8%, to $12.9 million during the nine months ended September 30, 2011 from $9.5 million during the nine months ended September 30, 2010. The change was primarily attributable to an increase of $2.1 million in personnel costs, including stock-based compensation, due to additional research and development personnel being hired to support our ongoing product development efforts. The change was also partly due to an increase of $0.6 million in Incapsula costs mainly due to it increasing its headcount during the nine months ended September 30, 2011. In addition, facility and depreciation expenses increased by $0.6 million.

 

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Sales and marketing expenses increased by $6.9 million, or 28.5%, to $31.0 million during the nine months ended September 30, 2011 from $24.1 million during the nine months ended September 30, 2010. The change was due to an increase of $5.1 million in personnel costs, including stock-based compensation, due to increased headcount in all regions in an effort to help drive our overall revenue growth, $1.4 million in promotional and other marketing related expenses, $0.3 million in travel expenses, and $0.1 million in Incapsula marketing expenses.

General and administrative expenses increased by $2.9 million, or 54.7%, to $8.2 million during the nine months ended September 30, 2011 from $5.3 million during the nine months ended September 30, 2010. The change was primarily due to an increase of $2.6 million in personnel costs, including stock-based compensation, related to increased headcount to support the growth and operations of our business and to support our planned initial public offering, and $0.3 million in increased facility and depreciation expenses.

Loss from Operations

 

       Nine Months Ended
September 30,
     Change  
     2010      2011      Amount      %  
     (dollars in thousands)  
   $  (9,219    $ (8,522    $ (697      (7.6 )% 

Our loss from operations decreased by $0.7 million, or 7.6%, from $9.2 million during the nine months ended September 30, 2010 to $8.5 million during the nine months ended September 30, 2011. Our gross profit increased by $13.9 million during the nine months ended September 30, 2011 due to higher net revenues. This gross profit increase was partially offset by increased sales and marketing costs of $6.9 million to expand the Company’s global sales efforts, increased research and development personnel costs of $3.4 million from planned hiring to support our ongoing product development efforts, and an increase of $2.9 million of general and administrative costs primarily related to personnel costs related to the increased global scope and operations of our business. The increase in operating expenses during the nine months ended September 30, 2011 was consistent with our planned headcount increases to support the increase in scope and global reach of our business.

Other Income (Expense), net

Other (expense), net increased by $0.6 million to $0.2 million during the nine months ended September 30, 2011 from other income, net, of $0.4 million during the nine months ended September 30, 2010. The change was primarily due to an increase of $0.2 million in foreign currency exchange losses, a decrease of $0.1 million in forward foreign exchange contract gains, net, and an increase in convertible preferred stock warrant losses of $0.2 million in the nine months ended September 30, 2011.

Provision for Income Taxes

 

       Nine Months Ended
September 30,
    Change  
         2010             2011         Amount        %  
     (dollars in thousands)  

Provision for income taxes

   $ 331      $ 471      $ 140           42.3   

Effective tax rate

     (3.7 )%      (5.4 )%        

The provisions for income taxes for the nine months ended September 30, 2010 and 2011 are comprised primarily of foreign income taxes. The increase in the provision for income taxes in the nine months ended September 30, 2011 compared with the nine months ended September 30, 2010 was primarily attributable to an increase in income in our foreign operations.

 

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Deferred Revenue

 

     As of September 30,      Change  
         2010              2011          Amount      %  
     (In thousands)         

Total deferred revenue

     16,752         25,560         8,808         52.3   

Deferred revenue increased by $8.8 million, or 52.3%, to $25.6 million as of September 30, 2011 from $16.8 million as of September 30, 2010. The growth in our deferred revenue was primarily attributable to an increase in our installed base of products and licenses worldwide and new sales, as well as renewals, of maintenance and support agreements for our installed base of products and licenses.

Number of Customers

 

     As of September 30,      Change  
       2010          2011        Amount      %  

Number of customers

     1,181         1,584         403         34.1   

Our number of customers increased by 403, or 34.1%, to 1,584 as of September 30, 2011 from 1,181 as of September 30, 2010. Our growth in customer count was driven by increasing market acceptance of our products as well as an increase in our global sales organization from 120 people as of September 30, 2010 to 125 as of September 30, 2011. The growth in our sales organization was consistent with our plans to continue expanding our global sales coverage, in particular our channel partner sales and support teams. This increase allowed us to target additional customers across all of our geographies, particularly in the Asia Pacific region.

Comparison of the Years Ended December 31, 2009 and 2010

Net Revenue

 

    Years Ended December 31,    
    2009   2010   Change
    Amount   % of
Net
Revenue
  Amount   % of
Net
Revenue
  Amount   %
    (dollars in thousands)

Net revenue by type:

                       

Products and license

    $ 25,727         65.4       $ 34,479         62.3       $ 8,752         34.0  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Services:

                       

Maintenance and support

      11,840         30.1         18,064         32.5         6,224         52.6  

Professional services and training

      1,763         4.5         2,465         4.5         702         39.8  

Subscriptions

      11         0.0         374         0.7         363         *  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Total services

      13,614         34.6         20,903         37.7         7,289         53.5  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Total net revenue

    $ 39,341         100.0       $ 55,382         100.0       $ 16,041         40.8  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Net revenue by geographic region:

                       

Americas

    $ 24,869         63.3       $ 36,586         66.0       $ 11,717         47.1  

EMEA

      9,929         25.2         13,492         24.4         3,563         35.9  

Asia Pacific

      4,543         11.5         5,304         9.6         761         16.8  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Total net revenue

    $ 39,341         100.0       $ 55,382         100.0       $ 16,041         40.8  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

  * Not meaningful

 

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Our net revenue increased by $16.1 million, or 40.8%, to $55.4 million in 2010 from $39.3 million in 2009 primarily due to growth in products and license revenue and services revenue. This increase reflects the increased demand for our product and service offerings consistent with our business plan and expectations for growth when compared to 2009 net revenues, which were somewhat impacted by challenging economic conditions. The Americas region contributed the largest portion of this growth with an $11.7 million increase, or 47.1% change over 2009, and the EMEA region contributed an increase of $3.6 million, or 35.9% growth over 2009.

Products and license revenue increased by $8.8 million, or 34.0%, to $34.5 million in 2010 from $25.7 million in 2009. The change was primarily due to increased sales volume of our products in the Americas and EMEA regions.

Services revenue increased by $7.3 million, or 53.5%, to $20.9 million in 2010 from $13.6 million in 2009. During 2010, our services revenue was comprised of $18.0 million in maintenance and support, $2.5 million in professional services and training and $0.4 million in subscriptions. The change in services revenue in 2010 compared to 2009 was primarily due to an increase of $6.2 million in maintenance and support revenue resulting from our larger installed base, a $0.7 million increase in professional services and training due to increased demand for our products and a $0.4 million increase in subscriptions revenue from our ThreatRadar service, which launched during the first quarter of 2010, and our SOC service, which launched in late 2009.

Gross Profit

 

     Years Ended December 31,        
     2009     2010        
     Amount      Gross
Margin
    Amount      Gross
Margin
    %
Change
 
     (dollars in thousands)        

Products and license gross profit

   $ 20,932         81.4   $ 28,574         82.9     1.5   

Services gross profit

     9,038         66.4     14,475         69.2     2.8   
  

 

 

      

 

 

      

Total gross profit

   $ 29,970         76.2   $ 43,049         77.7     1.5   
  

 

 

      

 

 

      

The 1.5 percentage point increase in products and license gross margin in 2010 was primarily due to margin improvement on all appliance platforms due to cost improvements in our hardware appliances and a shift in our product mix towards our higher throughput appliances, which generally have higher gross margins. The 2.8 percentage point increase in services gross margin was due to higher utilization of our support teams in addition to the continued maturation of our products, which results in lower support costs.

Operating Expenses

 

     Years Ended December 31,         
     2009      2010      Change  
     Amount      % of
Net
Revenue
     Amount      % of
Net
Revenue
     Amount      %  
     (dollars in thousands)  

Operating expenses:

                 

Research and development

   $ 10,538         26.8       $ 13,214         23.9       $ 2,676         25.4   

Sales and marketing

     26,920         68.4         34,168         61.7         7,248         26.9   

General and administrative

     4,669         11.9         7,982         14.4         3,313         71.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 42,127         107.1       $ 55,364         100.0       $ 13,237         31.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

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Results above include stock-based compensation of:

 

    

Years Ended

        
     December 31,      Increase  
     2009      2010     
     (In thousands)  

Research and development

   $ 57       $ 66       $ 9   

Sales and marketing

     218         257         39   

General and administrative

     109         273         164   
  

 

 

    

 

 

    

 

 

 
   $ 384       $ 596       $ 212   
  

 

 

    

 

 

    

 

 

 

Research and development expenses increased by $2.7 million, or 25.4%, to $13.2 million in 2010 from $10.5 million in 2009. The change was primarily due to an increase of $1.6 million in personnel costs, including stock-based compensation, due primarily to the hiring of additional research and development personnel to support our product development efforts. The change was also partly due to an increase of $0.9 million in research and development costs from Incapsula, which commenced operations in November 2009 and increased hiring throughout 2010.

Sales and marketing expenses increased by $7.3 million, or 26.9%, to $34.2 million in 2010 from $26.9 million in 2009. The change was primarily due to an increase of $5.4 million in personnel costs, including stock-based compensation, primarily related to increased headcount in the Americas region and, to a lesser extent, sales commissions, an increase of $1.1 million in marketing expenses primarily related to marketing promotions and initiatives aimed at promoting our brand and creating market awareness of our technology and our products and an increase of $0.5 million in travel expenses. The change was also partly due to an increase of $0.2 million primarily in Incapsula’s personnel costs.

General and administrative expenses increased by $3.3 million, or 71.0%, to $8.0 million in 2010 from $4.7 million in 2009. The change was primarily related to an increase of $1.8 million in personnel costs, including stock-based compensation, due to increased headcount in our accounting and legal departments, $1.0 million in professional services expense related primarily to patent litigation and $0.3 million in rent and occupancy-related expenses. The change was also partly due to an increase of $0.2 million primarily in Incapsula’s personnel costs.

Loss from Operations

 

     Years ended
December 31,
    Change  
     2009     2010     Amount     %  
           (dollars in thousands)        
   $ (12,157   $ (12,315   $ (158     (1.3 )% 

Our loss from operations increased by $0.2 million, or 1.3%, to $12.3 million in 2010 from $12.1 million in 2009. Our gross profit increased in 2010 by $13.1 million as a result of higher revenue. However, this gross profit increase was more than offset by increased operating expenses of $13.3 million. The higher operating expenses were attributable to sales and marketing spending of $7.3 million primarily related to increased sales headcount in the Americas region, higher research and development costs of $2.7 million as we expanded our product development efforts, including work on our Incapsula product offering which began in November 2009, and increased general and administrative costs of $3.3 million from additional legal and accounting personnel costs, and to a lesser extent, higher outside professional service expenses related primarily to patent litigation. The increase in operating expenses and resulting loss from operations in 2010 was consistent with our planned headcount increases to support the increase in scope and global reach of our business, in addition to the inclusion of Incapsula results for the full year ended December 31, 2010 as compared to only a portion of the year ended December 31, 2009.

 

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Table of Contents

Other Income (Expense), net

Other income, net increased $0.3 million, or 166.3%, to $0.5 million in 2010 primarily due to increased foreign exchange gains of $0.3 million. The gains were primarily due to the weakening of the U.S. dollar against the Israeli shekel.

Provision for Income Taxes

 

     Years Ended
December 31,
    Change  
     2009     2010     Amount      %  
     (dollars in thousands)  

Provision for income taxes

   $ 360      $ 527      $ 167         46.4   

Effective tax rate

     (3.0 )%      (4.5 )%      

The provision for income taxes in 2009 and 2010 are comprised primarily of foreign income taxes. The increase in the provision for income taxes in 2010 compared with 2009 was primarily attributable to an increase in income in our foreign operations.

Deferred Revenue

 

       As of December 31,        Change  
       2009        2010        Amount        %  
       (In thousands)           

Total deferred revenue

       13,377           21,218           7,841           58.6   

Deferred revenue increased by $7.8 million, or 58.6%, to $21.2 million as of December 31, 2010 from $13.4 million as of December 31, 2009. The growth in our deferred revenue was primarily attributable to an increase in our installed base of products and licenses worldwide and new sales, as well as renewals, of maintenance and support agreements for our installed base of products and licenses. The balance of deferred revenue as of December 31, 2010 also included an increase in multi-year maintenance and support agreements, which resulted in the higher non-current deferred revenue balance of $7.5 million as of December 31, 2010 as compared to $2.1 million as of December 31, 2009.

Number of Customers

 

       As of December 31,        Change  
           2009               2010           Amount        %  

Number of customers

       926           1,309           383           41.4   

Our number of customers increased by 383, or 41.4%, to 1,309 as of December 31, 2010 from 926 as of December 31, 2009. During this period, we increased our sales organization from 101 employees as of December 31, 2009 to 120 as of December 31, 2010 as part of our strategy to continue to expand our global sales coverage, in particular our channel partner sales and support teams. This allowed us to increase the number of new accounts we could reach across all of our geographies.

 

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Comparison of the Years Ended December 31, 2008 and 2009

Net Revenue

 

    Years Ended December 31,        
    2008     2009     Change  
    Amount     % of
Net
Revenue
    Amount     % of
Net
Revenue
    Amount      %  
    (dollars in thousands)  

Net revenue by type:

            

Products and license

  $ 24,298        75.6      $ 25,727        65.4      $ 1,429         5.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

Services:

            

Maintenance and support

    7,192        22.4        11,840        30.1        4,648         64.6   

Professional services and training

    656        2.0        1,763        4.5        1,107         168.8   

Subscriptions

    —          0.0        11        0.0        11         *   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

Total services

    7,848        24.4        13,614        34.6        5,766         73.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

Total net revenue

  $ 32,146        100.0      $ 39,341        100.0      $ 7,195         22.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

Net revenue by geographic region:

            

Americas

  $ 21,770        67.7      $ 24,869        63.2      $ 3,099         14.2   

EMEA

    6,706        20.9        9,929        25.2        3,223         48.1   

Asia Pacific

    3,670        11.4        4,543        11.6        873         23.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

Total net revenue

  $ 32,146        100.0      $ 39,341        100.0      $ 7,195         22.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

  * Not meaningful

Our net revenue increased by $7.2 million, or 22.4%, to $39.3 million in 2009 from $32.1 million in 2008 primarily due to growth in products and license revenue and services revenue as we executed on planned hiring of sales personnel to further generate demand for our product and service offerings worldwide. The EMEA region contributed $3.2 million of the increase, or a 48.1% change over 2008, and the Americas region contributed $3.1 million of the increase, or a 14.2% change over 2008.

Products and license revenue increased by $1.4 million, or 5.9%, to $25.7 million in 2009 from $24.3 million in 2008. The change was primarily due to increased sales volume of our products in the EMEA and Asia Pacific regions, partially offset by a decrease in sales in the Americas region due to challenging economic conditions in the United States in 2009.

Services revenue increased by $5.8 million, or 73.5%, to $13.6 million in 2009 from $7.8 million in 2008. During 2009, our services revenue was comprised of $11.8 million in maintenance and support and $1.8 million in professional services and training. The increase in services revenue during 2009 compared to 2008 was primarily due to an increase of $4.6 million in maintenance and support revenue resulting from our larger installed base, and a $1.1 million increase in professional services and training revenue primarily related to increased demand for our products.

Gross Profit

 

     Years Ended December 31,        
     2008     2009        
     Amount      Gross
Margin
    Amount      Gross
Margin
    Change  
     (dollars in thousands)        

Products and license gross profit

   $ 20,637         84.9   $ 20,932         81.4     (3.5

Services gross profit

     4,393         56.0     9,038         66.4     10.4   
  

 

 

      

 

 

      

Total gross profit

   $ 25,030         77.9   $ 29,970         76.2     (1.7
  

 

 

      

 

 

      

 

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The 3.5 percentage point decrease in products and license gross margin in 2009 was primarily due to a shift in our product mix towards our lower margin, lower throughput products as a result of challenging economic conditions. The 10.4 percentage point increase in services gross margin in 2009 was primarily due to higher utilization of our support teams and improvement in our ability to renew pre-existing maintenance and support agreements.

Operating Expenses

 

     Years Ended December 31,         
     2008      2009      Change  
     Amount      % of
Net
Revenue
     Amount      % of
Net
Revenue
     Amount      %  
     (dollars in thousands)  

Operating expenses:

                 

Research and development

   $ 8,591         26.7       $ 10,538         26.8       $ 1,947         22.7   

Sales and marketing

     20,447         63.7         26,920         68.4         6,473         31.7   

General and administrative

     3,608         11.2         4,669         11.9         1,061         29.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 32,646         101.6       $ 42,127         107.1       $ 9,481         29.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Results above include stock-based compensation expense of:

 

             Years Ended December 31,           
     2008      2009      Increase  
    

(dollars in thousands)

 

Research and development

   $ 41       $ 57       $ 16   

Sales and marketing

     163         218         55   

General and administrative

     48         109         61   
  

 

 

    

 

 

    

 

 

 
   $ 252       $ 384       $ 132   
  

 

 

    

 

 

    

 

 

 

Research and development expenses increased by $1.9 million, or 22.7%, to $10.5 million in 2009 from $8.6 million in 2008. The change was primarily due to an increase of $1.3 million in personnel costs, including stock-based compensation, due to the hiring of additional research and development personnel in 2009 to support our ongoing product development efforts and a $0.6 million increase in facilities expenses and depreciation expenses.

Sales and marketing expenses increased by $6.5 million, or 31.7%, to $26.9 million in 2009 from $20.4 million in 2008. The change was primarily due to an increase of $5.0 million in personnel costs, including stock-based compensation, primarily related to increased headcount in the Americas region and, to a lesser extent, sales commissions, an increase of $0.9 million in travel costs due to additional sales and marketing personnel hired, a $0.3 million increase in facilities expenses and a $0.3 million increase in fees paid to third parties who generated sales leads for us.

General and administrative expenses increased by $1.1 million, or 29.4%, to $4.7 million in 2009 from $3.6 million in 2008. The change was primarily related to an increase in personnel costs, including stock-based compensation, due to increased headcount across the accounting and legal departments to support the growth of our business.

Loss from Operations

 

     Years ended
December 31,
    Change  
     2008     2009     Amount     %  
     (dollars in thousands)  
   $ (7,616   $ (12,157   $ (4,541     (59.6 )% 

 

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Our loss from operations increased by $4.5 million, or 59.6%, to $12.1 million in 2009 from $7.6 million in 2008. Operating expenses increased $9.5 million in 2009 as compared to 2008, and more than offset the $5.0 million increase in gross profit during 2009. The higher operating expenses can be primarily attributed to increased sales and marketing spending of $6.5 million from increased sales headcount in the Americas region, higher research and development costs of $1.9 million as we expanded our product development efforts, and increased general and administrative costs of $1.1 million as a result of increased legal and accounting staff to support our business growth. The increase in operating expenses and resulting loss from operations in 2009 was consistent with our planned headcount increases to support product development and product enhancement efforts and the increased scope and global reach of our business.

Other Income (Expense), net

Other income (expense), remained unchanged at $0.2 million in 2009 compared to 2008.

Provision for Income Taxes

 

       Years Ended
December 31,
    Change  
       2008     2009     Amount         
      

(dollars in thousands) 

 

Provision for income taxes

     $ 229      $ 360      $ 131           57.2   

Effective tax rate

       (3.1 )%      (3.0 )%        

The provision for income taxes in 2009 and 2008 are comprised primarily of foreign income taxes.

Deferred Revenue

 

       As of December 31,        Change  
         2008          2009        Amount        %  
       (In thousands)           

Total deferred revenue

       8,060           13,377           5,317           66.0   

Deferred revenue increased by $5.3 million, or 66.0%, to $13.4 million as of December 31, 2009 from $8.1 million as of December 31, 2008. The growth in our deferred revenue was primarily attributable to increased renewals of pre-existing support and maintenance agreements during 2009 when compared to 2008. The increase in renewals grew the installed base of products and licenses being supported as of December 31, 2009, thus resulting in higher deferred revenue balances as of December 31, 2009 when compared to December 31, 2008.

Number of Customers

 

       As of December 31,        Change  
         2008            2009          Amount        %  

Number of customers

       587           926           339           57.8   

Our number of customers increased by 339, or 57.8%, to 926 as of December 31, 2009 from 587 as of December 31, 2008. During this period, we increased our sales organization from 70 employees as of December 31, 2008 to 101 as of December 31, 2009. This allowed us to expand our geographic reach as well as increase the number of new accounts we could reach across all of our geographies.

 

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Table of Contents

Quarterly Results of Operations

The following table sets forth our unaudited quarterly consolidated statement of operations data for each of the eleven quarters ended September 30, 2011. The data presented below has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus, and in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

 

    Three Months Ended  
    March 31,
2009
    June 30,
2009
    Sept. 30,
2009
    Dec. 31,
2009
    March 31,
2010
    June 30,
2010
    Sept. 30,
2010
    Dec. 31,
2010
    March 31,
2011
    June 30,
2011
    Sept. 30,
2011
 
    (dollars in thousands)        

Net revenue:

                     

Products and license

  $ 4,296      $ 5,272      $ 6,975      $ 9,184      $ 6,966      $ 8,319      $ 8,247      $ 10,947      $ 9,978      $ 11,379     

$

11,464

  

Services:

                     

Maintenance and support

    2,429        2,691        3,015        3,706        3,810        4,402        4,704        5,148        5,407        5,907     

 

6,452

  

Professional services and training

    366        355        563        478        465        667        584        749        817        1,243     

 

1,418

  

Subscriptions

    —          —          —          11        75        48        111        140        221        297     

 

404

  

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total services

    2,795        3,046        3,578        4,195        4,350        5,117        5,399        6,037        6,445        7,447     

 

8,274

  

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    7,091        8,318        10,553        13,379        11,316        13,436        13,646        16,984        16,423        18,826        19,738   

Cost of revenue:

                     

Products and license

    724        941        1,389        1,741        1,154        1,537        1,432        1,782        1,371        1,705        1,357   

Services

    1,131        1,157        1,036        1,252        1,452        1,564        1,623        1,789        1,963        2,206        2,893   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    1,855        2,098        2,425        2,993        2,606        3,101        3,055        3,571        3,334        3,911        4,250   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    5,236        6,220        8,128        10,386        8,710        10,335        10,591        13,413        13,089        14,915        15,488   

Gross margin

    74     75     77     78     77     77     78     79     80     79     78

Operating expenses:

                     

Research and development

    2,408        2,483        2,813        2,834        2,956        3,042        3,470        3,746        3,927        4,316        4,615   

Sales and marketing

    5,178        6,080        6,945        8,717        7,593        8,072        8,430        10,073        10,000        10,559        10,411   

General and administrative

    1,119        925        1,127        1,498        1,519        1,662        2,111        2,690        2,294        2,829        3,063   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    8,705        9,488        10,885        13,049        12,068        12,776        14,011        16,509        16,221        17,704        18,089   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (3,469     (3,268     (2,757     (2,663     (3,358     (2,441     (3,420     (3,096     (3,132     (2,789     (2,601

Other income (expense), net

    (239     321        142        (46     23        (471     805        117        (89     (86     (63
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision from income taxes

    (3,708     (2,947     (2,615     (2,709     (3,335     (2,912     (2,615     (2,979     (3,221     (2,875     (2,664

Provision for income taxes

    107        15        51        187        62        26        243        196        116        150        205   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (3,815     (2,962     (2,666     (2,896     (3,397     (2,938     (2,858     (3,175     (3,337     (3,025     (2,869

Loss attributable to noncontrolling interest

    —          —          —          43        89        104        63        99        131        149        178   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Imperva, Inc. stockholders

  $ (3,815   $ (2,962   $ (2,666   $ (2,853   $ (3,308   $ (2,834   $ (2,795   $ (3,076   $ (3,206   $ (2,876   $ (2,691
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Quarterly Trends

Total Net Revenue Trends

Revenue increased each quarter as compared with the same period in the prior year due to increases in sales of our products and due to increases in our services revenue primarily resulting from increases in our installed base of customers. We believe that our revenue reflects seasonality. The fourth quarter of each year is typically our strongest quarter due to customer budget and purchasing trends, and demand for our products and services is typically slowest in the first quarter.

Cost of Revenue Trends

Cost of revenue has increased in each quarter as compared with the same period in the prior year primarily due to increased shipments of hardware appliances and the growth in size of our support and professional services organization to support increases in our installed base. While costs have generally increased along with the associated revenue, gross profit also increased. Gross margins ranged from 74% to 80%. The improved gross margins in 2010 resulted from shipments of a lower cost hardware appliance and a shift in our product mix to higher margin, higher throughput products. Our gross margins typically decrease slightly in the first quarter as we experience fewer billable hours for professional services and training due to holidays and scheduled internal training.

Operating Expenses Trends

Total operating expenses increased in each quarter as compared with the same period in the prior year, primarily due to the addition of personnel in connection with the expansion of our business. Operating expenses decreased as a percentage of revenue during each quarter of 2010 and 2011 when compared to the same period in the prior year. Revenue seasonality also has an impact on operating expenses as we typically experience a slight reduction in operating expenses in the first quarter compared to the preceding year’s fourth quarter due to lower commission payments.

Liquidity and Capital Resources

To date, we have satisfied our capital and liquidity needs through sales of our products and services and private placements of convertible preferred stock. We have incurred significant losses as we continue to expand our business. Our cash flow from operating activities will continue to be affected principally by the extent to which our revenue exceeds or does not exceed any increase in spending on personnel to support the growth of our business. Our largest source of operating cash flow is cash collections from our customers.

Capital Resources

As of September 30, 2011, we had $13.0 million of cash, cash equivalents and short-term investments, $2.1 million of which is currently held outside of the United States and not presently available to fund domestic operations and obligations. If the Company were to repatriate cash held outside of the United States, it could be subject to U.S. income taxes on such amounts, less any previously paid foreign income taxes. Our cash, cash equivalents and short-term investments have declined from $24.9 million as of December 31, 2008 to $13.0 million as of September 30, 2011. This decrease was primarily the result of our losses from operations as we funded our growth, including the development of future products and product enhancements, and expanded into new sales channels and geographies. We believe our existing cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including, among other things, market acceptance of our products, the cost of our research and development activities, the acquisition of other businesses and overall economic conditions.

 

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As of September 30, 2011, we had $3.0 million of outstanding debt under our credit facility agreement. As of March 31, 2011, we were not compliant with the minimum tangible net worth requirement of $3.0 million under the credit facility. In April 2011, we amended the terms of our credit facility agreement to delete the minimum tangible net worth requirement and amended the covenant requiring us to maintain a minimum cash and cash equivalents balance to increase the minimum balance from $3.0 million to $6.0 million. As of September 30, 2011, we were in compliance with the amended covenant under our credit facility.

Cash Flows

The following summary of our cash flows for the periods indicated has been derived from our consolidated financial statements which are included elsewhere in this prospectus:

 

    Years Ended December 31,     Nine Months Ended September 30,  
    2008     2009     2010           2010                 2011        
    (dollars in thousands)  

Net cash used in operating activities

  $ (5,164   $ (5,511   $ (1,049   $ (831   $ (5,056

Net cash provided by (used in) investing activities

    (1,558     (1,942     (4,573     (4,250     401   

Net cash provided by financing activities

    20,156        831        3,274        2,558        1,202   

Our cash, cash equivalents and short-term investments have declined from $24.9 million as of December 31, 2008 to $13.0 million as of September 30, 2011. This decrease is primarily the result of our losses from operations as we funded our operations, including the development of future products and product enhancements, and expanded into new sales channels and geographies.

Cash Flows from Operating Activities

We have historically experienced negative cash flow from operations as we continue to expand our business. Our largest uses of cash from operating activities are for employee related expenditures. Our primary source of cash flow from operating activities is cash receipts from customers. Our cash flow from operations will continue to be affected principally by the extent to which we grow our revenues and increase our headcount, primarily in our sales and marketing and research and development functions, in order to grow our business.

Net cash used in operating activities of $5.1 million for the nine months ended September 30, 2011 reflected a net loss of $9.2 million, partially offset by non-cash charges of $2.4 million, as well as a net change of $1.7 million in our net operating assets and liabilities. The net change in our operating assets and liabilities was the result of a $4.3 million increase in our deferred revenue, which represents unearned amounts billed to our customers, resulting from our larger installed base combined with strong maintenance and support renewal rates from our existing customers, and an increase in accrued compensation and benefits of $0.7 million. These amounts were partially offset by an increase in accounts receivable of $2.3 million and a decrease in accrued and other liabilities of $1.0 million.

Net cash used in operating activities of $1.0 million for 2010 reflected a net loss of $12.4 million, partially offset by a net change of $9.5 million in our net operating assets and liabilities and aggregate non-cash charges of $1.8 million. The net change in our operating assets and liabilities was primarily a result of an $7.8 million increase in our deferred revenue, a $1.5 million increase in accrued compensation and benefits, a $2.0 million increase in accrued and other current liabilities, partially offset by an increase in accounts receivable of $0.7 million, an increase in prepaid expenses and other current assets of $0.7 million, and a decrease in accounts payable of $0.6 million. Non-cash charges included $1.2 million of depreciation and amortization and $0.6 million of stock-based compensation.

 

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Net cash used in operating activities of $5.5 million for 2009 reflected a net loss of $12.3 million, partially offset by a net change of $5.7 million in our net operating assets and liabilities and aggregate non-cash charges of $1.1 million. The net change in our operating assets and liabilities was primarily a result of a $5.3 million increase in our deferred revenue. Non-cash charges included $0.7 million of depreciation and amortization and $0.4 million of stock-based compensation.

Net cash used in operating activities of $5.2 million for 2008 reflected a net loss of $7.7 million, partially offset by a net change of $1.8 million in our net operating assets and liabilities and aggregate non-cash charges of $0.7 million. The net change in our operating assets and liabilities was primarily a result of a $3.0 million increase in our deferred revenue combined with a $2.3 million increase in accounts payable and accrued expenses offset by a $3.0 million increase in accounts receivable. Non-cash charges consisted of $0.5 million in depreciation and amortization and $0.3 million in stock-based compensation.

Cash Flows from Investing Activities

Our investing activities consist primarily of capital expenditures to purchase property and equipment and purchases and sales of investments. During the nine months ended September 30, 2011, cash provided by investing activities was $0.4 million, primarily as a result of $2.3 million in proceeds from maturities of short-term investments partially offset by $1.0 million in capital expenditures and $1.0 million in purchases of short-term investments.

In 2010, cash used in investing activities of $4.6 million was primarily attributable to $2.9 million in capital expenditures, a $0.9 million increase in restricted cash relating to our purchase commitments and $0.8 million in net purchases of short-term investments.

In 2009, cash used in investing activities of $1.9 million was primarily attributable to $1.3 million in capital expenditures and $0.5 million in net purchases of short-term investments.

In 2008, cash used in investing activities of $1.6 million was primarily attributable to $1.3 million in capital expenditures and a $0.3 million increase in restricted cash relating to our purchase commitments.

Cash Flows from Financing Activities

To date, our primary financing activities have been the sale of our convertible preferred stock.

During the nine months ended September 30, 2011, cash provided by financing activities was $1.2 million, primarily as a result of net borrowings of $2.5 million on our revolving credit facility, $1.0 million in proceeds from the issuance of restricted stock, and $0.5 million in proceeds from the exercise of stock options. These amounts were partially offset by a net increase of $2.8 million in other assets.

In 2010, cash provided by financing activities was $3.3 million, which consisted of $2.8 million in proceeds from the issuance of restricted stock, $0.6 million in proceeds from the exercise of stock options, and $0.5 million in borrowings on our revolving credit facility, partially offset by $0.6 million in repayments on the convertible promissory note that Incapsula entered into in November 2009 with our Chief Executive Officer.

In 2009, cash provided by financing activities was $0.8 million due primarily to the $0.6 million in proceeds we received from the convertible promissory note Incapsula entered into in November 2009 with our Chief Executive Officer, as well as $0.2 million in proceeds from the exercise of stock options.

In 2008, cash provided by financing activities was $20.2 million due to the receipt of $20.0 million in net proceeds from the sale of our Series D convertible preferred stock, as well as $0.2 million in proceeds from the exercise of stock options.

 

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For a description of our issuance of restricted stock and transactions with Incapsula, see “Certain Relationships and Related Person Transactions.”

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and include our accounts and the accounts of our wholly-owned subsidiaries and Incapsula, our majority owned subsidiary. The preparation of our consolidated financial statements requires our management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the applicable periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that they believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.

The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

Our management must make significant judgments and estimates to determine revenue to be recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management makes different judgments or utilizes different estimates.

We derive revenue from two sources: (i) products and license revenue, which includes hardware and perpetual software license revenue and (ii) services revenue, which includes maintenance, professional services, training and subscription arrangements. Substantially all of product and license sales have been sold in combination with maintenance services. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery or performance has occurred; the sales price is fixed or determinable; and collection is reasonably assured.

We define each of the four criteria above as follows:

 

  Ÿ  

Persuasive evidence of an arrangement exists.     Evidence of an arrangement consists of a purchase order issued pursuant to the terms and conditions of a distributor or value-added reseller agreement and, in limited cases, an end user agreement and/or purchase order.

 

  Ÿ  

Delivery or performance has occurred.     We use shipping and related documents, or written evidence of customer acceptance, when applicable, to verify delivery or performance. We recognize product revenue upon transfer of title and risk of loss, which primarily is upon shipment to value-added resellers, distributors or end users. We do not have significant obligations for future performance, such as customer acceptance provisions, rights of return or pricing credits, associated with our sales.

 

  Ÿ  

The sales price is fixed or determinable.     We assess whether the sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment. Standard payment terms to customers range from 30 to 90 days. In the event payment terms are provided that differ from our standard business practices, the fees are deemed to not be fixed or determinable and revenue is recognized when the payments become due, provided the remaining criteria for revenue recognition have been met.

 

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  Ÿ  

Collection is reasonably assured.     We assess probability of collection on a customer-by-customer basis. Our customers are subjected to a credit review process that evaluates their financial condition and ability to pay for products and services. If we conclude that collection is not reasonably assured based upon an initial review, we do not recognize revenue until payment is received.

Maintenance and subscription revenue includes arrangements for software maintenance and technical support for our products and subscription services revenue primarily related to our cloud-based services. The terms of our subscription service arrangements do not provide customers the right to take possession of the related software. Maintenance is offered under renewable, fee-based contracts, which include technical support, hardware repair and replacement parts, bug fixes, patches and unspecified upgrades on a when-and-if-available basis. Maintenance and subscription revenue is initially deferred and recognized ratably over the life of the contract, with the related expenses recognized as incurred. Maintenance and subscription contracts usually have a term of one to three years. Unearned maintenance and subscription revenue is included in deferred revenue.

Professional service revenue primarily consists of the fees we earn related to installation and consulting services. We recognize revenue from professional services upon delivery or completion of performance. Professional service arrangements are typically short term in nature and are largely completed within 90 days from the start of service.

Training services are recognized upon delivery of the training.

Multiple Element Arrangements

In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for revenue recognition to remove from the scope of industry-specific software revenue recognition guidance any tangible products containing software components and non-software components that operate together to deliver the product’s essential functionality. In addition, the FASB amended the accounting standards for multiple element revenue arrangements not within the scope of industry-specific software revenue recognition guidance to:

 

  Ÿ  

Provide updated guidance on whether multiple elements exist, how the elements in an arrangement should be separated, and how the arrangement consideration should be allocated to the separate elements;

 

  Ÿ  

Implement a price hierarchy, where the selling price for an element is based on vendor-specific objective evidence (“VSOE”), if available; third-party evidence (“TPE”), if available and VSOE is not available; or the best estimate of selling price (“BESP”), if neither VSOE or TPE is available; and

 

  Ÿ  

Eliminate the use of the residual method and require an entity to allocate arrangement consideration using the relative selling price method.

We adopted this accounting guidance at the beginning of the first quarter of 2010 on a prospective basis for applicable transactions originating or materially modified after December 31, 2009. As a result of the adoption, net revenue for the year ended December 31, 2010, was approximately $1.5 million higher than the net revenue that would have been recorded under the previous accounting rules. Net loss and net loss per share of common stock for the year ended December 31, 2010, were approximately $1.3 million and $0.28 lower than the net loss and net loss per share of common stock that would have been recorded under the previous accounting rules.

This guidance does not change the units of accounting for our revenue transactions. Our non-software products and services qualify as separate units of accounting because they have value to the customer on a stand-alone basis and our revenue arrangements do not include a general right of return for delivered products.

 

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Most of our products are hardware appliances containing software components that function together to provide the essential functionality of the product. Therefore, our hardware appliances are considered non-software deliverables and have been removed from the industry-specific software revenue recognition guidance.

Our product revenue also includes revenue from the sale of stand-alone software products. Stand-alone software may operate on our hardware appliance, but is not considered essential to the functionality of the hardware and continues to be subject to the industry-specific software revenue recognition guidance, which remains unchanged.

Certain of our stand-alone software when sold with hardware appliances is considered essential to the functionality and as a result is no longer accounted for under industry-specific software revenue recognition guidance; however, this same software when sold separately is accounted for under the industry-specific software revenue recognition guidance. Additionally, we provide unspecified software upgrades for our products, on a when-and-if available basis, through maintenance and support contracts. To the extent that the software being supported is not considered essential to the functionality of the hardware, these support arrangements would continue to be subject to the industry specific software revenue recognition guidance.

For stand-alone software sales after December 31, 2009 and for all transactions entered into prior to January 1, 2010, we recognize revenue based on software revenue recognition guidance. Under the software revenue recognition guidance, we use the residual method to recognize revenue when a product agreement includes one or more elements to be delivered at a future date and VSOE of the fair value of all undelivered elements exists. In the majority of our contracts, the only element that remains undelivered at the time of delivery of the product is maintenance and support services. Under the residual method, VSOE of the fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized as product revenue. If evidence of VSOE of the fair value of one or more undelivered elements does not exist, all revenue is generally deferred and recognized when delivery of those elements occurs or when fair value can be established.

For all other transactions originating or materially modified after December 31, 2009, we recognize revenue in accordance with the amended accounting guidance. For certain arrangements with multiple deliverables, we allocate the arrangement fee to the non-software element based upon the relative selling price of such element and, if software and software-related (e.g., maintenance and support for the software element) elements are also included in the arrangement, we allocate the arrangement fee to each of those software and software-related elements as a group. After such allocations are made, the amount of the arrangement fee allocated to the software and software-related elements is accounted for using the residual method. When applying the relative selling price method, we determine the selling price for each element using VSOE of selling price, if it exists, or if not, TPE of selling price, if it exists. If neither VSOE nor TPE of selling price exist for an element, we use our BESP for that element. The revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for that element. We limit the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services, or subject to our future performance obligation.

Consistent with our methodology under previous accounting guidance, VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for a service fall within a reasonably narrow pricing range, evidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range of the median rates. In addition, we consider major service groups and geographies in determining VSOE.

 

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We are typically not able to determine TPE for our products or services. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis.

When we are unable to establish the selling price of our non-software deliverables using VSOE or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We determine BESP for the purposes of allocating the arrangement by reviewing external and internal market factors including, but not limited to, pricing practices including discounting, the geographies in which we offer our products and services, the type of customer (i.e., distributor, value added reseller or direct end user) and competition. Additionally, we consider historical transactions, including transactions whereby the deliverable was sold on a stand-alone basis. The determination of BESP is made through consultation with and approval by our management. Selling prices are analyzed on a quarterly basis to identify if we have experienced significant changes in our selling prices.

For our non-software deliverables we allocate the arrangement consideration based on the relative selling price of the deliverables. For our hardware appliances we use BESP as the selling price as we have no history of selling our hardware appliances separately. For our maintenance and support and professional services and training, we primarily use VSOE as the selling price and when we are unable to establish selling price using VSOE, we used BESP.

Stock-Based Compensation

We recognize compensation costs related to stock options and shares of restricted stock granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. For stock options, we estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.

The fair value of the option awards during 2008, 2009, 2010 and the nine months ended September 30, 2010 and 2011 was calculated using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

     Years Ended December 31,     Nine Months Ended September 30,  
     2008     2009     2010     2010     2011  
           (Unaudited)  

Expected dividend rate

     0     0     0     0     0

Risk-free interest rate

     3.0     2.5     2.2     2.1     2.0

Expected term (in years)

     6.0        6.0        6.1        5.6        5.8   

Expected volatility

     58     55     51     51     49

The Black-Scholes options pricing model requires the use of highly subjective and complex assumptions which determine the fair value of share-based awards, including the option’s expected term and the price volatility of the underlying stock. These assumptions include:

Expected Term .    The expected term represents the period over which the stock-based awards are expected to be outstanding. For option grants that are considered to be “plain vanilla,” we used the simplified method to determine the expected term as set forth in the guidance provided

by the Securities and Exchange Commission. The simplified method calculates the expected term

 

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as the average of the time-to-vesting and the contractual life of the options. For option grants that are not considered “plain vanilla,” the expected term is based on historical option exercise behavior and post-vesting cancellations of options by employees.

Risk-Free Interest Rate .    The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to each award’s expected term.

Expected Volatility .    Since we do not have a trading history of our common stock, the expected volatility was derived from the average historic volatilities of several unrelated public companies within our industry that we considered to be comparable to our business over a period equivalent to the expected term of the stock option grants.

Expected Dividend .    The expected dividend was assumed to be zero as we have never paid dividends and have no current plans to do so.

In addition to assumptions used in the Black-Scholes option pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for expense related to our awards. Our forfeiture rate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the financial statements.

We will continue to use judgment in evaluating the expected term, expected volatility and forfeiture rate related to our own stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to the estimates of our expected volatility, expected terms and forfeiture rates, which could materially impact our future stock-based compensation expense.

Significant Factors, Assumptions and Methodologies Used in Determining Fair Value of Common Stock

We are also required to estimate the fair value of the common stock underlying our stock-based awards when performing the fair value calculations with the Black-Scholes option pricing model. The fair values of the common stock underlying our stock-based awards were estimated on each grant date by our board of directors, with input from management. Our board of directors is comprised of a majority of non-employee directors with significant experience in the information technology industry. We believe that our board of directors has the relevant experience and expertise to determine a fair value of our common stock on each respective grant date. Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (“AICPA Practice Aid”), our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock including:

 

  Ÿ  

contemporaneous valuations performed by unrelated third party specialists;

 

  Ÿ  

prices for our convertible preferred stock sold to outside investors in arm’s-length transactions;

 

  Ÿ  

rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;

 

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  Ÿ  

actual operating and financial performance;

 

  Ÿ  

hiring of key personnel and the experience of our management;

 

  Ÿ  

risks inherent in the development of our products and services;

 

  Ÿ  

likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given prevailing market conditions and the nature and history of our business;

 

  Ÿ  

market value of a comparable group of privately held companies that are in a similar state of development to ours;

 

  Ÿ  

illiquidity of stock-based awards involving securities in a private company;

 

  Ÿ  

industry information such as market size and growth; and

 

  Ÿ  

macroeconomic conditions.

In valuing our common stock, the board of directors determined the equity value of our business by taking a weighted combination of the value indications under two valuation approaches, an income approach and a market approach.

The income approach estimates the present value of future estimated cash flow based upon forecasted revenue and costs. These future projected cash flows are discounted to their present values using a discount rate. Because the cash flows are only projected over a limited number of years, it is also necessary under the income approach to compute a terminal value as of the last period for which cash flows are projected. This terminal value is essentially an estimate of enterprise value at that future point in time and is determined by capitalizing the free cash flows corresponding to the last period in the forecast period and applying a terminal multiple. This amount is then discounted to its present value using a discount rate to arrive at the terminal value. The discounted projected cash flows and the terminal value are summed together to arrive at an indicated enterprise value under the income approach. In applying the income approach, we derived the discount rate from an analysis of the costs of capital of our comparable industry peers as of each valuation date and adjusted to reflect the risks inherent in the business cash flows. The terminal value is an assumed implicit growth rate in perpetuity.

The market approach estimates the fair value of our company by applying market multiples of our comparable industry peer companies based on key metrics implied by the enterprise values or acquisition values of our comparable publicly traded companies. Given our significant focus on investing in and growing our business, we primarily utilized the revenue multiple when performing our valuation assessment under the market approach. Because we are incurring operating losses and negative operating cash flows as we grow and invest in our business, we believe that a revenue multiple is the most useful metric to use when estimating our value as compared to other companies. In addition, our comparable industry peer companies are also at varying stages of growth and investment, further demonstrating why we believe that earnings or cash flow multiples were not considered relevant. The selection of our comparable industry peer companies and revenue multiples are significant inputs into our valuation analyses and, as noted in the following discussion of our contemporaneous valuation results from period to period, significantly impacted the growth in the valuation of our common stock during early 2011.

When considering which companies to include in our comparable industry peer companies, we focused on U.S. based publicly traded companies in the information technology security industry in which we operate. The selection of our comparable industry peer companies requires us to make judgments as to the comparability of these companies to us. We considered a number of factors including business description, business size, market share, revenue model, development stage and historical operating results. We then analyzed the business and financial profiles of the selected

 

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companies for relative similarities to us and, based on this assessment, we selected our comparable industry peer companies. Several of the comparable industry peer companies are our competitors and are generally larger than us in terms of total revenue and assets. Others like us, are in the investment and growth stage and have experienced operating losses as they have been growing their business or have recently started generating net income.

The selection of our industry comparable peer companies has changed over time based upon our continuing evaluation of whether we believed the selected companies remained comparable to us. Specifically, we used the same comparable industry peer companies for our December 31, 2009 through August 1, 2010 contemporaneous valuations. For the September 30, 2010 contemporaneous valuation, we replaced two of the comparable peer companies as they were no longer publicly traded. For our February 28, 2011 and subsequent contemporaneous valuations, we replaced two of the comparable industry peer companies who we believed were no longer comparable to us. Based on these considerations, we believe that the comparable industry peers selected are a representative group for purposes of performing contemporaneous valuations. The same comparable industry peers were also used in determining various other estimates and assumptions in our contemporaneous valuations.

In applying the market approach, we first obtained the stock price and market capitalization for each of our comparable industry peer companies. We then calculated an estimated enterprise value for each comparable industry peer company. Next, we obtained prior year results of operations as well as current year and next year revenue estimates for each of the companies from market or industry information and calculated revenue multiples for each year by dividing each company’s calculated enterprise value by their prior year revenue or estimates. We then estimated the revenue multiple for the comparable industry peer companies and adjusted those multiples based on our assessment of the strengths and weaknesses of our company relative to these comparable companies. We then applied the adjusted multiple to our revenue data to arrive at a valuation of our company.

For each valuation, we prepared a financial forecast to be used in both the income and market approaches. The financial forecast took into account our past financial results, our business experiences and our future expectations. We factored the risk associated with achieving our forecast in selecting appropriate multiples and discount rates. There is inherent uncertainty in these estimates, as the assumptions we used were highly subjective and subject to change as a result of new operating data and economic and other conditions that impact our business.

The fair value of our business was then allocated to each of our classes of stock using either the Option Pricing Method or the Probability Weighted Expected Return Method.

The Option Pricing Method (“OPM”) treats common stock and convertible preferred stock as call options on an enterprise value, with exercise prices based on the liquidation preference of the convertible preferred stock. Therefore, the common stock has value only if the funds available for distribution to the stockholders exceed the value of the liquidation preference at the time of a liquidity event such as a merger, sale or initial public offering, assuming the enterprise has funds available to make a liquidation preference meaningful and collectible by the stockholders. The common stock is modeled to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the convertible preferred stock is liquidated. The OPM uses the Black-Scholes option pricing model to price the call option. The OPM is appropriate to use when the range of possible future outcomes is so difficult to predict that forecasts would be highly speculative.

The Probability Weighted Expected Return Method (“PWERM”) involves a forward-looking analysis of the possible future outcomes of the enterprise. This method is particularly useful when discrete future outcomes can be predicted at a high confidence level with a probability distribution. Discrete future

 

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outcomes considered under the PWERM included non-initial public offering market based outcomes as well as initial public offering scenarios. In the non-initial public offering scenarios, a large portion of the equity value is allocated to the convertible preferred stock to reflect the preferred stock liquidation preferences. In the initial public offering scenarios, the equity value is allocated pro rata among the shares of common stock and each series of convertible preferred stock, which causes the common stock to have a higher relative value per share than under the non-initial public offering scenario. The fair value of the enterprise determined using the initial public offering and non-initial public offering scenarios was weighted according to the board of directors’ estimate of the probability of each scenario.

In order to determine the fair value of our common stock, we applied a discount for lack of marketability to the value derived from the OPM or PWERM.

Over time, as certainty developed regarding possible discrete events, including an initial public offering, the allocation methodology utilized to allocate our enterprise value to our common stock transitioned from the OPM, which was utilized through September 30, 2010, to the PWERM, which has been utilized since February 28, 2011.

Information regarding stock option grants, which includes grants of restricted stock, since January 1, 2010 is summarized as follows:

 

Grant Date

   Number of Options
Granted
     Exercise
Price
     Fair Value Per Share
of Common Stock
     Aggregate Grant
Date Fair Value(1)
 

February 5, 2010

     471,950       $ 1.68       $ 1.68       $ 412,396   

June 4, 2010

     206,800         2.52         2.52         262,492   

August 25, 2010

     155,650         3.30         3.30         248,430   

September 28, 2010

     130,061         3.30         3.70         246,406   

September 30, 2010

     843,819         3.30         3.70         1,643,845   

November 17, 2010

     278,650         3.70         3.70         515,257   

March 2, 2011

     393,075         5.42         5.42         1,049,591   

April 8, 2011

     39,200         5.42         5.42         104,494   

May 19, 2011

     148,100         8.06         8.06         577,341   

August 25, 2011

     349,625         10.70         13.72         1,909,319   

 

 

(1) Aggregate grant date fair value was determined using the Black-Scholes option pricing model.

The intrinsic value of all outstanding options as September 30, 2011 was $33.9 million based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus.

No single event caused the valuation of our common stock to increase or decrease from February 5, 2010 through August 25, 2011. Instead, a combination of the factors described below in each period led to the changes in the fair value of the underlying common stock.

December 31, 2009 Contemporaneous Valuation

As of December 31, 2009, the board determined a fair value of our common stock to be $1.62 per share. The December 31, 2009 contemporaneous valuation was prepared on a minority, non-marketable interest basis assuming we were in Stage 4 of enterprise development which is defined by the AICPA Practice Aid as an enterprise that has achieved key development milestones, recognized product revenues but is still operating at a loss. Our enterprise value was determined using an income approach and market approach. We determined that we had equal confidence in both approaches and, therefore, weighted them equally to determine a weighted enterprise value of $112.3 million, before factoring in any discounts or allocation. Under the market approach, the revenue

 

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multiples that were applied to revenue were 1.9 times for the last 12 months (“LTM”), 1.7 times for 2010 and 1.5 times for 2011. The multiples used were in the first quartile of our comparable industry peer companies, which we believed to be appropriate considering our current stage of development. Under the income approach, a terminal growth rate of 4% was applied to the free cash flows. In addition, a discount rate of 20.38% was determined to be reasonable and appropriate to apply to the cash flow forecast under the income approach given our stage of development and inherent risks.

We then allocated our enterprise value to the common stock utilizing an OPM with the following assumptions: a time to a liquidity event of 1.5 years, a risk-free rate of 0.81% and volatility of 60.87% over the time to a liquidity event. The results from the OPM were then reduced by a 28.29% marketability discount which determined the fair value of the Company’s common stock to be $1.62 per share as of December 31, 2009. Based on this valuation and other factors, our board of directors used $1.68 per share for the exercise price for the options granted on February 5, 2010, which was deemed to be the fair value of our common stock on the grant date. No other options were granted during this period between the December 31, 2009 valuation and the date of the subsequent contemporaneous valuation performed as of March 31, 2010.

March 31, 2010 Contemporaneous Valuation

As of March 31, 2010, our board of directors determined a fair value of our common stock to be $2.52 per share. The March 31, 2010 contemporaneous valuation was prepared on a minority, non-marketable interest basis assuming we were in Stage 4 of enterprise development. Our enterprise value was determined using an income approach and market approach, which was weighted equally to determine a weighted enterprise value of $148.2 million, before factoring in any discounts or allocations. Our projected cash flow included updated cash flow projections from the December 31, 2009 contemporaneous valuation and the projected cash flow from our majority owned subsidiary Incapsula of which we purchased an additional ownership interest during March 2010. This resulted in an increase to our calculated enterprise value. Under the market approach, the revenue multiple applied was 2.2 times for 2010. The multiple used was in the first quartile of our comparable industry peer companies, which we believed to be appropriate considering our current stage of development. In addition, applying only the 2010 revenue multiple was believed to be reasonable as it appropriately captured future expectations of the Company’s business. Under the income approach, a terminal growth rate of 4% was applied to the free cash flows. A discount rate of 20.36% was determined to be reasonable and appropriate to apply to the cash flow forecast under the income approach given our stage of development and inherent risks.

We then allocated our enterprise value to the common stock utilizing an OPM with the following assumptions: a time to a liquidity event of 1.5 years, a risk-free rate of 0.73% and volatility of 51.98% over the time to a liquidity event. The results from the OPM were then reduced by a 28.0% marketability discount which determined the fair value of the Company’s common stock to be $2.52 per share as of March 31, 2010. The increase in the fair value of our common stock was attributable to higher projected cash flows that were used to calculate our enterprise value under the income and market approaches. Based on this valuation and other factors, our board of directors used $2.52 per share for the exercise price of the options granted on June 4, 2010, which was deemed to be the fair value of our common stock on the grant date. No other options were granted during this period between the March 31, 2010 valuation and the date of the subsequent contemporaneous valuation performed on August 1, 2010.

August 1, 2010 Contemporaneous Valuation

As of August 1, 2010, our board of directors determined a fair value of our common stock to be $3.30 per share. The August 1, 2010 contemporaneous valuation was prepared on a minority, non-marketable interest basis assuming we were in Stage 4 of enterprise development. Our enterprise

 

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value was determined using the income approach and market approach, which we weighted equally to determine a weighted enterprise value of $174.9 million, before factoring in any discounts or allocation. Our projected cash flows were increased from our March 31, 2010 valuation to reflect the stronger sales growth we experienced during the second quarter of 2010 from international sales and customer acceptance of our ThreatRadar product, resulting in a significant increase in our calculated enterprise value under both the income and market approaches. Under the market approach, the revenue multiple applied was 2.6 times for 2010. The multiple was the median of our comparable industry peer companies, which we believed to be appropriate considering our current stage of development. However, one of the comparable industry peer companies was not used in calculating the median for the comparable industry peer companies as it was delisted before the valuation date. This resulted in a higher median comparable multiple being used, as the delisted company historically had the lowest revenue multiple of all the comparable industry peer companies. Under the income approach, a terminal growth rate of 4% was applied to the free cash flows. A discount rate of 20.7% was determined to be reasonable and appropriate to apply to the cash flow forecast under the income approach given our stage of development and inherent risks.

We then allocated our enterprise value to the common stock utilizing an OPM with the following assumptions: a time to a liquidity event of 1.4 years, a risk-free rate of 0.39% and volatility of 49.66% over the time to a liquidity event. The results from the OPM were then reduced by a 28.0% marketability discount which determined the fair value of the Company’s common stock to be $3.30 per share as of August 1, 2010. The increase in the estimated fair value of our common stock from our March 31, 2010 valuation was primarily due to the strong growth we experienced during the second quarter of 2010 combined with higher revenue multiples from our peer companies due to improving economic conditions that were used to determine our enterprise value under the market approaches. Based on this valuation and other factors, our board of directors used $3.30 per share for the exercise price for the options granted on August 25, 2010 and September 28, 2010. Our board of directors also used $3.30 for the exercise price of our restricted stock units granted on September 30, 2010.

In connection with the preparation of our December 31, 2010 financial statements and the initial filing of our registration statement on Form S-1, we assessed the fair value of the underlying common stock used to calculate the related stock-based compensation expense for financial reporting purposes. Due to the close proximity between the September 28, 2010 and the September 30, 2010 grant dates and the September 30, 2010 contemporaneous valuation (issued November 8, 2010), we determined the fair value of our common stock should be $3.70 per share, which is consistent with the fair value of our common stock as determined by our September 30, 2010 contemporaneous valuation. We also assessed the fair value of the underlying common stock used to calculate the related stock-based compensation expense for all of our other 2010 and 2011 stock option grants. However, based on the size and timing of the grants, we did not believe it was necessary to change the underlying fair value of the common stock for any of the remaining option grants which occurred between valuation dates.

September 30, 2010 Contemporaneous Valuation

As of September 30, 2010, our board of directors determined a fair value of our common stock to be $3.70 per share. The September 30, 2010 contemporaneous valuation was prepared on a minority, non-marketable interest basis assuming we were in Stage 4 of development. Our enterprise value was determined using an income approach and market approach, which we weighted equally to determine a weighted enterprise value of $195.0 million, before factoring in any discounts or allocation. Under the market approach, the revenue multiple that was applied was 2.0 times for 2011, which was less than the mean and median of the comparable industry peer companies. Our projected revenues were lowered slightly due to weaker than expected performance during the third quarter; however, the

 

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long-term growth projections remained in intact. We also added two new comparable companies to our comparable industry peer companies to replace two companies which had been delisted. Under the income approach, a terminal growth rate of 4% was applied to the free cash flows. A discount rate of 20.67% was determined to be reasonable and appropriate to apply to the cash flow forecast under the income approach given our stage of development and inherent risks.

We then allocated our enterprise value to the common stock utilizing an OPM with the following assumptions: a time to a liquidity event of 1.75 years, a risk-free rate of 0.39% and volatility of 51.23% over the time to a liquidity event. The results from the OPM were then reduced by a 30.0% marketability discount which determined the fair value of the Company’s common stock to be $3.70 per share as of September 30, 2010. The increase in the fair value of our common stock from our August 1, 2010 valuation was attributable to our third quarter operating results combined with improving economic conditions. Based on this valuation and other factors, our board of directors used $3.70 per share for the exercise price for the options granted on November 17, 2010. No other options were granted during this period between the September 30, 2010 valuation and the date of the subsequent contemporaneous valuation performed as of February 28, 2011.

February 28, 2011 Contemporaneous Valuation

As of February 28, 2011, our board of directors determined a fair value of the common stock to be $5.42 per share. This contemporaneous valuation was prepared on a minority, non-marketable interest basis assuming we were still in Stage 4 of enterprise development. For this valuation, the market approach was utilized and the income approach was not used because projected economic benefits to the stockholders are expected to be realized in the form of an initial public offering or merger in which market participants are expected to value the business primarily using valuation multiples derived from market data rather than from the application of discount rates to future earnings or cash flow. A risk-adjusted discount of 25.0% based upon an adjusted capital asset pricing model was then applied to the values derived from the market approach.

We used a PWERM for the February 28, 2011 valuation which requires us to estimate the probability of future scenarios for our business including an initial public offering scenario and a merger or sale scenario. As noted previously, the OPM is preferred when future outcomes are difficult to predict and the PWERM becomes useful when discrete future outcomes become more predictable. During the period between September 2010 and February 2011, the range of discrete events, specifically initial public offering scenarios, became fairly well established; therefore, the PWERM was utilized to estimate the fair value of the common stock as of February 28, 2011 with the following scenario probabilities: initial public offering scenario with a 25% probability of occurring between June 2012 and 2013, and a merger or sale scenario with a 75% probability of occurring between June 2012 and December 2013. The composition of our comparable industry peer companies used in the initial public offering scenarios changed as a result of the replacement of two companies that we no longer believed were comparable. For the initial public offering scenarios, the revenue multiples used were between the LTM first quartile and third quartile multiples of our comparable industry peer companies, or 2.6 times to 5.1 times revenue.

For the merger or sale scenarios, transaction data from twenty companies who were also of a similar size was analyzed to determine revenue multiples. For the merger or sale scenarios, the transaction multiples were between the first quartile and high revenue multiples of peer companies who had completed a transaction, or 2.1 times to 4.1 times revenue. Each scenario was then weighted accordingly to arrive at a weighted enterprise value of $201.0 million. The results from the PWERM were then discounted by a 25.0% marketability discount to determine the fair value of the common stock of $5.42 per share. The increase in the fair value of our common stock from our September 30, 2010 valuation was attributable to our strong fourth quarter operating results combined with our switch

 

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to the PWERM which resulted in a significant increase in the revenue and comparable transaction multiples used to determine our enterprise value. Based on this valuation and other factors, our board of directors used $5.42 per share for the exercise price for the options granted on March 2, 2011 and April 8, 2011.

April 30, 2011 Contemporaneous Valuation

As of April 30, 2011, our board of directors determined a fair value of the common stock to be $8.06 per share. This contemporaneous valuation was prepared on a minority, non-marketable interest basis assuming we were still in Stage 4 of enterprise development. The market approach was utilized because the projected economic benefits to the stockholders are expected to be realized in the form of an initial public offering or merger. A risk-adjusted discount of 25.0% based upon an adjusted capital asset pricing model was then applied to the values derived from the market approach.

We used a PWERM to estimate the fair value of the common stock as of April 30, 2011 with the following scenario probabilities: initial public offering scenario with a 45% probability of occurring between December 2011 and December 2012 and a merger or sale scenario with a 55% probability of occurring between December 2011 and December 2012. For the initial public offering scenarios, the revenue multiples used were between the LTM low and third quartile multiples of our comparable industry peer companies, or 2.9 times to 5.5 times revenue. For the merger or sale scenarios, transaction data from twenty companies who were also of a similar size was analyzed to determine revenue multiples. For the merger or sale scenarios, the transaction multiples were above the first quartile and third quartile revenue multiples of peer companies who had completed a transaction, or 1.3 times to 3.7 times revenue. Each scenario was then weighted accordingly to arrive at a weighted enterprise value of $237.4 million. The results from the PWERM were then discounted by a 15.0% marketability discount to determine the fair value of the common stock of $8.06 per share. The increase in the fair value of our common stock from our February 28, 2011 valuation was primarily attributable to our progress towards an initial public offering and our strong first quarter operating results. Based on this valuation and other factors, our board of directors used $8.06 per share for the exercise price for the options granted on May 19, 2011.

No single event caused the April 30, 2011 valuation of the common stock to increase from our February 28, 2011 valuation; rather, it was a combination of factors. We believe that the primary factor resulting in an increase in the fair value of our common stock from the February 28, 2011 contemporaneous valuation of $5.42 per share to the April 30, 2011 contemporaneous valuation of $8.06 per share was the continued progress towards the completion of the initial public offering process, including an initial public offering organizational meeting in April 2011. In the February 28, 2011 contemporaneous valuation, our board of directors assigned a 25% probability to the possibility of an initial public offering. For our April 30, 2011 contemporaneous valuation, our board of directors assigned a 45% probability to the possibility of an initial public offering. Given that we started preparation for an initial public offering in April 2011, a 45% probability was determined to be reasonable. As a result of the increased possibility of an initial public offering, our estimated weighted enterprise value before a marketability discount was applied increased from $201.0 million to $237.4 million.

The increase was also attributable to a 10% decrease in the marketability discount from 25% for the February 28, 2011 contemporaneous valuation compared to 15% for the April 30, 2011 contemporaneous valuation. The decrease was due to our shortened timeframe to an initial public offering as a result of the organizational meeting held in April 2011.

To a lesser extent, the increase is also attributable to business developments during the period between February 2011 and May 2011. Specifically, our first quarter and April 2011 operating results continued to be strong due to an increase in product sales and customer acceptance of our ThreatRadar product launched in the first quarter of 2010.

 

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June 30, 2011 Contemporaneous Valuation

As of June 30, 2011, our board of directors determined a fair value of the common stock to be $10.70 per share. This contemporaneous valuation was prepared on a minority, non-marketable interest basis assuming we were still in Stage 4 of enterprise development. The market approach was utilized because the projected economic benefits to the stockholders are expected to be realized in the form of an initial public offering or merger. A risk-adjusted discount of 25.0% based upon an adjusted capital asset pricing model was then applied to the values derived from the market approach.

Our PWERM estimate of the fair value of the common stock as of June 30, 2011 was calculated using the following scenario probabilities: an initial public offering scenario with a 55% probability of occurring between December 2011 and December 2012 and a merger or sale scenario with a 45% probability of occurring between December 2011 and December 2012. For the initial public offering scenarios, the revenue multiples used were between the LTM first quartile and median multiples of our comparable industry peer companies, or 3.7 times to 6.1 times revenue. For the merger or sale scenarios, transaction data from sixteen companies in the data or enterprise security markets was analyzed to determine revenue multiples. For the merger or sale scenarios, the transaction multiples were between the first quartile and median revenue multiples of peer companies who had completed a transaction, or 1.6 times to 4.4 times revenue. In general, the values from the merger or sale scenarios were lower than the values for the initial public offering scenarios. Each scenario was then weighted accordingly to arrive at a weighted enterprise value of $317.1 million. The results from the PWERM were then discounted by an 11.8% marketability discount to determine the fair value of the common stock of $10.70 per share. The increase in the fair value of our common stock from our April 30, 2011 valuation was primarily attributable to our progress towards an initial public offering and our strong second quarter operating results.

No single event caused the June 30, 2011 valuation of the common stock to increase from our April 30, 2011 valuation; rather, it was a combination of factors. We believe that the primary factor resulting in an increase in the fair value of our common stock from the April 30, 2011 contemporaneous valuation of $8.06 per share to the June 30, 2011 contemporaneous valuation of $10.70 per share was the continued progress towards the completion of the initial public offering process, including the filing of our registration statement on June 17, 2011. In the April 30, 2011 contemporaneous valuation, our board of directors assigned a 45% probability to the possibility of an initial public offering. For our June 30, 2011 contemporaneous valuation, our board of directors assigned a 55% probability to the possibility of an initial public offering. Given that we filed a registration statement for an initial public offering on June 17, 2011, an increase from a 45% probability to 55% probability was determined to be reasonable. As a result of the increased probability of an initial public offering and the higher transaction multiples attributable to initial public offering scenarios, our estimated weighted enterprise value before a marketability discount was applied increased from $237.4 million to $317.1 million.

The increase was also attributable to a 3.2% decrease in the marketability discount from 15% for the April 30, 2011 contemporaneous valuation compared to 11.8% for the June 30, 2011 contemporaneous valuation. The decrease was due to our shortened timeframe to an initial public offering as a result of the filing of our registration statement.

To a lesser extent, the increase is also attributable to business developments during the period between April 30, 2011 and June 30, 2011. Specifically, our second quarter operating results continued to be strong due to an increase in product sales, particularly in the EMEA and Asia Pacific regions.

Our historical practice has been to determine the fair value of our common stock on a periodic basis and to grant common stock following such determination at fair value based in part upon such periodic valuations conducted by an independent valuation specialist. As discussed above, the most recent periodic valuation of our common stock was as of June 30, 2011 and no common stock had

 

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been granted between May 19, 2011 and August 25, 2011. Representatives of the managing underwriters attended a portion of the meeting of our board of directors held on August 25, 2011 and discussed the current state of the capital markets and the challenges and risks associated with pursuing an initial public offering during the quarter ending September 30, 2011. At the August 25, 2011 meeting, representatives of the managing underwriters were not prepared to provide us with an estimated offering price range to be included in this prospectus or the initial public offering price. Accordingly, we requested that during the week of August 29, 2011, representatives of the managing underwriters provide our board of directors with an estimated offering price range to be included in this prospectus. As such, without having received guidance on an estimated offering price range from the representatives of the managing underwriters at the August 25, 2011 board meeting and consistent with its historical practice, our board of directors granted options and made stock awards on August 25, 2011 at a fair value of $10.70 per share, based in part on a valuation conducted by an independent valuation specialist of our common stock as of June 30, 2011.

On August 31, 2011, representatives of the managing underwriters attended a meeting of our board of directors and provided guidance on an estimated offering price range for our offering, assuming the offering were to close by September 30, 2011. At that meeting, representatives of the managing underwriters indicated to our board of directors that the estimated offering price range was subject to fluctuation based on market conditions. Based upon all of the factors discussed above, we believe our board of directors appropriately granted options and made stock awards on August 25, 2011 at what it believed was the fair value of the common stock at the time of grant. However, because of the close proximity between the August 25, 2011 grants and the date that representatives of the managing underwriters provided guidance to our board of directors on an estimated offering price range, which was higher than the fair value of $10.70 per share of the options and stock awards granted on August 25, 2011, we reassessed, as of August 25, 2011, the fair value of the underlying common stock used to calculate the related stock-based compensation expense solely for financial reporting purposes and determined the fair value of the common stock for financial reporting purposes should be $13.72 per share rather than $10.70 as previously determined. The reassessed value was determined using the same valuation techniques as the June 30, 2011 valuation, except the probability assigned to an initial public offering was increased from 55% to 75% and the probability of a merger or sale was reduced from 45% to 25%. Further, the marketability discount was reduced to 8% due to the shortened time frame to a potential initial public offering. We shortened the initial public offering timing assumption from December 31, 2011 to September 30, 2011.

We believe the difference between our determination of fair value for financial reporting purposes on August 25, 2011 and the assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, results primarily from the following factors:

 

  Ÿ  

Substantially Enhanced Balance Sheet and Financial Resources. The proceeds of a successful initial public offering would strengthen substantially our balance sheet as a result of increased cash. Additionally, the completion of an initial public offering would provide us with access to the public company debt and equity market. The difference between the August 25, 2011 reassessment of the fair value of our common stock and the midpoint of the estimated offering price range set forth on the cover page of this prospectus, was that the reassessment assigned a 75% probability to the possibility of an initial public offering, and the midpoint of the estimated offering price range set forth on the cover page of this prospectus assumes the successful completion of our initial public offering.

 

  Ÿ  

Substantially Enhanced Liquidity and Marketability of Our Stock. The reassessed value of our common stock as of August 25, 2011, reflected the illiquidity of our common stock on that date and the uncertainty of an initial public offering. The midpoint of the estimated offering price range set forth on the cover page of this prospectus assumes a successful offering and

 

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represents an estimate of the fair value of the unrestricted, freely tradable stock that would be sold in the public offering market without liquidity and marketability discounts.

 

  Ÿ  

Initial Public Offering Scenario Probability. For the August 25, 2011 reassessment of the fair value of our common stock, we assigned a 75% probability to the possibility of an initial public offering. However, the midpoint of the estimated offering price range set forth on the cover page of this prospectus assumes the successful completion of a public offering, resulting in an increased common stock valuation as compared to prior valuations.

 

  Ÿ  

Different Valuation Models. The midpoint of the estimated offering price range set forth on the cover page of this prospectus is based in part on guidance provided to our board of directors on an estimated offering price range by representatives of the managing underwriters. The valuation models used by representatives of the managing underwriters incorporate different comparable companies and future outcome scenarios as compared to the comparable companies and future outcome scenarios considered by us in the reassessment of the fair value of our common stock as of August 25, 2011. Specifically, the valuation model utilized by representatives of the managing underwriters incorporated a broader set of comparable companies and limited the future outcome scenario only to an initial public offering rather than both an initial public offering scenario and a merger or sale scenario. Further, the midpoint of the estimated offering price range set forth on the cover page of this prospectus is consistent with the values used for the initial public offering scenario in the August 25, 2011 reassessment.

Our stock-based compensation expense for awards granted is as follows:

 

     Years Ended December 31,      Nine Months Ended September 30,  
     2008      2009      2010      2010      2011  
     (in thousands)  

Cost of revenue

   $ 22       $ 37       $ 44       $ 28       $ 73   

Research and development

     41         57         66         37         83   

Sales and marketing

     163         218         257         191         245   

General and administrative

     48         109         273         60         753   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 274       $ 421       $ 640       $ 316       $ 1,154   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2010 and September 30, 2011 we had $1.4 million and $3.9 million, respectively of unrecognized stock-based compensation expense, net of estimated forfeitures, that is expected to be recognized over a weighted average period of 2.9 years and 2.8 years, respectively. In future periods, our stock-based compensation expense is expected to increase as a result of our existing unrecognized stock-based compensation to be recognized as these awards vest and as we issue additional stock-based awards to attract and retain employees.

Long-Lived Assets

Property and equipment are stated at cost less accumulated depreciation on our consolidated balance sheets. Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. We make estimates of the useful life of our property and equipment in order to determine depreciation expense to be recorded each reporting period based on similar assets purchased in the past and our historical experience with such similar assets, or asset group, as well as anticipated technological or market changes. The estimated useful life of our property and equipment directly impacts the timing of when our depreciation expense is recognized. There is significant judgment involved with estimating the useful lives of our property and equipment, and a change in the estimates of such useful lives could cause our depreciation expense in future periods to increase significantly.

We assess impairment of our property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset is impaired or the estimated useful lives

 

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are no longer appropriate. Circumstances such as changes in technology or in the way an asset is being used may trigger an impairment review. If indicators of impairment exist and the undiscounted projected cash flow associated with such assets are less than the carrying amount of the asset, an impairment loss is recorded to write the asset down to their estimated fair values. Fair value is estimated based on discounted future cash flow. We have not recognized an impairment charge on our property and equipment in our consolidated statement of operations during 2008, 2009, 2010 and during the nine months ended September 30, 2010 and 2011.

Income Taxes

We account for income taxes in accordance with FASB ASC No. 740   (“ASC 740”), Accounting for Income Taxes. We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, tax benefits and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to our tax provision in the subsequent period when such a change in estimate occurs.

We use an asset and liability approach for accounting of deferred income taxes, which requires recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements, but have not been reflected in our taxable income. Estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred income tax assets, which arise from temporary differences and carry-forwards. Deferred income tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We regularly assess the likelihood that our deferred income tax assets will be realized based on the realization criteria set forth in ASC No. 740. To the extent that we believe any amounts are not more likely than not to be realized, we record a valuation allowance to reduce our deferred income tax assets. In the event we determine that all or part of the net deferred tax assets are not realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. Similarly, if we subsequently realize deferred income tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in an adjustment to earnings in the period such determination is made. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize and measure potential liabilities based upon criteria set forth in ASC 740. Based upon these criteria, we estimate whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities may result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities is less than the amount ultimately assessed, a further charge to expense would result.

Significant judgment is required in determining any valuation allowance recorded against deferred income tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred income tax assets that could be realized, we will adjust our valuation allowance with a corresponding effect to the provision for income taxes in the period in which such determination is made.

Significant judgment is also required in evaluating our uncertain tax positions under ASC 740 and determining our provision for income taxes. Although we believe our reserves for uncertain tax positions are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We

 

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adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserves for uncertain tax positions and any changes to the reserves that are considered appropriate, as well as the related net interest and penalties, if applicable.

Contractual Obligations

The following summarizes our contractual obligations as of December 31, 2010:

 

     Payments Due by Period  

Contractual Obligations:

   2011      2012      2013      2014     

2015 and
    after    

     Total  
     (in thousands)  

Long-term debt obligations, including current portion(1)

   $ 501       $ —         $ —         $ —         $ —         $ 501   

Operating lease obligations(2)

     2,147         2,145         2,139         768         472         7,671   

Cancelable lease obligations(3)

     —           —           —           —           —           —     

Severance Pay Fund(4)

     —           —           —           —           —           2,372   

Purchase commitments(5)

     1,927         —           —           —           —           1,927   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,575       $ 2,145       $ 2,139       $ 768       $ 472       $ 12,471   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Long-term debt includes $0.5 million in principal under our credit facility agreement entered into in September 2010. During the nine months ended September 30, 2011, we borrowed an additional $2.5 million resulting in a total of $3.0 million outstanding under our credit facility as of September 30, 2011.
(2) Operating lease agreements represent our obligations to make payments under our non-cancelable lease agreements for our facilities. During the nine months ended September 30, 2011, we made regular lease payments of $1.8 million under the operating lease agreements.
(3) Cancelable lease obligations represent our obligations under our motor vehicle lease agreement. We have the option to cancel the lease at any time which may result in penalties in a maximum amount of $85,000 as of September 30, 2011. During the nine months ended September 30, 2011, we made regular lease payments of $0.7 million under the cancelable lease obligations.
(4) Our consolidated balance sheet as of December 31, 2010 includes $2.4 million of non-current liabilities for our Israeli severance pay fund. The specific timing of any cash payments relating to this obligation cannot be projected with reasonable certainty and, therefore, no amounts for this obligation are included in the annual columns of the table set forth above.
(5) Purchase commitments are contractual obligations to purchase hardware appliances and related component parts from our vendors in advance of anticipated sales.

In July 2011, Incapsula, our majority owned subsidiary, achieved certain performance milestones and, during the quarter ended September 30, 2011, we purchased 4,375,000 shares of Incapsula’s Series A-1 Preferred Stock for $3.5 million increasing our ownership interest in Incapsula to 82% on a shares outstanding basis on the date we made this additional investment. In addition, we will invest an additional $3.5 million in Incapsula, which we expect to fund from the net proceeds to us from this offering, and will receive in exchange an additional 4,375,000 shares of Incapsula’s Series A-1 Preferred Stock.

Off-Balance Sheet Arrangements

Through September 30, 2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose

 

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entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes.

Interest Rate Sensitivity

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our outstanding debt obligations. Our cash, cash equivalents and short-term investment accounts as of December 31, 2010 and September 30, 2011 totaled $17.7 million and $13.0 million, respectively, and consist primarily of cash, cash equivalents and short-term investments with maturities of less than one year from the date of purchase. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of the interest rates in the United States. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition or our results of operation.

As of September 30, 2011, we have $3.0 million in outstanding obligations under our credit facility agreement, which bears interest of 2.37%. To the extent in the future we enter into other long-term debt arrangements, we would be subject to fluctuations in interest rates which could have a material impact on our future financial condition and results of operation.

Foreign Currency Exchange Risk

Our consolidated results of operations and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. Substantially all of our revenue is generated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the U.S. and Israel and to a lesser extent in EMEA and Asia Pacific. Our consolidated results of operations and cash flow are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. The effect of a hypothetical 10% change in foreign currency exchanges rates applicable to our business would not have a material impact on our historical consolidated financial statements.

To date, we have used derivative financial instruments, specifically foreign currency forward contracts, to manage exposure to foreign currency risks, by hedging a portion of our forecasted expenses denominated in Israeli shekels expected to occur within a year. The effect of exchange rate changes on foreign currency forward contracts is expected to offset the effect of exchange rate changes on the underlying hedged item. We do not use derivative financial instruments for speculative or trading purposes.

Recent Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures . ASU 2010-06 requires disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers, beginning in the first quarter of 2010. Additionally, these amended standards require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3), beginning in the first quarter of 2011. The adoption of this new standard did not have a significant impact on the Company’s consolidated financial statements.

 

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BUSINESS

Overview

We are a pioneer and leader of a new category of data security solutions focused on providing visibility and control over high-value business data across critical systems within the data center. Our SecureSphere Data Security Suite is a broad solution designed to prioritize and mitigate risks to high-value business data, protect against hackers and malicious insiders and address and streamline regulatory compliance. SecureSphere is an integrated, modular suite, which provides database, file and web application security and secures all business data across various systems in data centers, including traditional on-premise data centers as well as private, public and hybrid cloud computing environments. We also offer on-demand, cloud-based security services which we believe provide cost-effective web application security.

We believe that organizations are facing numerous challenges in providing the visibility and control required to protect high-value business data from theft and exploitation. Enterprises must also comply with increasingly complex regulatory standards enacted to protect this data. As organizations adopt new technologies and architectures, they increase the complexity of, and open access to, the data center; thereby exposing their business data to new vulnerabilities. In addition, attacks, whether perpetrated by sophisticated hackers or malicious insiders, targeting high-value business data continue to increase in sophistication, scale and frequency. We believe that these challenges are driving the need for a new protection layer positioned closely around business data and systems in the data center and that traditional security and compliance products do not address this need.

We were founded in 2002 with the vision of protecting high-value business data within the enterprise. As of September 30, 2011, we had over 1,500 end-user customers, who we refer to in this prospectus as our customers, in more than 50 countries. In addition, our solutions are used to protect thousands of organizations through cloud-based deployments with our Software-as-a-Service (“SaaS”) customers and managed security service provider (“MSSP”) and hosting partners. Our customers include four of the top five telecommunications companies, three of the top five commercial banks in the United States, three of the top five financial data service firms, three of the top five computer hardware companies, two of the top five food and drug store companies, over 150 government agencies around the world and more than 100 Fortune 1000 companies. We primarily sell our products and services through our network of over 350 channel partners worldwide, including both distributors and resellers, which provide sales and support leverage to our sales organization. As of September 30, 2011, we had approximately 375 employees, including 134 employees in research and development. We generated revenue of $55.4 million in 2010, an increase of 41% over the $39.3 million in revenue we generated in 2009, and we reduced our net loss attributable to our stockholders to $12.0 million in 2010 from $12.3 million in 2009.

Industry Background

As a result of the rise in sophisticated attacks by hackers and malicious insiders, the difficulty in complying with regulations governing business data and the growing complexity of, and open access to, data centers, we believe that enterprises are struggling to provide visibility and control over business data that they need to protect. We believe these challenges are driving the need for a new protection layer positioned closely around business data and systems in the data center.

High-value business data is increasingly targeted for illicit financial, political and military gain.

Business data has always been valuable to legitimate organizations that use it to run their operations. The U.S. Office of the Director of National Intelligence February 2011 report and the Verizon 2011 Data Breach Investigation Report dated April 2011 indicate that organizations are increasing their collection, storage and use of high-value business data, including financial and credit

 

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card data, intellectual property and personally identifiable information. At the same time, the greater use and availability of this high-value business data has driven an increase in the monetary incentives for its theft and abuse.

The monetary value of business data has motivated the formation of a sophisticated and organized industry around the theft and exploitation of such data. According to the Verizon 2011 Data Breach Investigations Report dated April 2011, more than half of the data breaches involving external agents were perpetrated by individuals affiliated with organized crime. Further, these data breaches have fueled a data theft industry, in which black market forums advertise and trade stolen information, causing an estimated $1 trillion in annual losses to companies and individuals. (1)

However, the value of business data goes well beyond its financial value. Public incidents, such as the attack on, and infiltration of, Google Inc.’s corporate infrastructure, suspected to have been sponsored by a foreign government, and the various data leaks publicized by WikiLeaks, demonstrate the political and military value of data. These types of attacks seek high-value political and military data and are typically as sophisticated as attacks seeking valuable business data.

Enterprises struggle to comply with an increasingly complex regulatory environment.

In response to the increased threats to high-value business data and the potential harm to victims of fraud, identity theft and disclosure of personal information, governments and industry groups are enacting legislation and compliance standards to ensure that consumers and enterprises are informed of, and protected from, losses due to data breaches. Several new and expanding laws, regulations and industry standards, such as the Payment Card Industry Data Security Standard (“PCI-DSS”), Basel II, the Health Insurance Portability and Accountability Act (“HIPAA”), the Financial Services Modernization Act of 1999 (the “Gramm-Leach-Bliley Act”) and the Sarbanes-Oxley Act of 2002, mandate increased visibility and control of high-value business data, as well as the protection of data from unauthorized use and ongoing auditing and reporting duties.

In addition to growing in number, compliance and privacy regulations are increasingly global in scope and applicable to small and large enterprises in a variety of industries. The result is that many enterprises find themselves subject to an ever growing number of such regulations.

As enterprises implement internal compliance policies and best practices intended to secure high-value business data and enable regulatory compliance, they face a range of challenges.

 

  Ÿ  

These regulations typically apply to all data within the scope of a given mandate regardless of whether the data resides in applications, structured repositories such as databases, or unstructured repositories such as file servers and network-attached storage systems. Enterprises often lack complete visibility into the location and content of high-value business data and are therefore unable to protect it.

 

  Ÿ  

Frequent organizational changes and an ever evolving, increasingly distributed IT infrastructure often result in users having excessive rights to sensitive data. Many enterprises lack the time and resources necessary to manually review and update user rights, which often results in unwarranted data access.

 

  Ÿ  

Traditional approaches to the auditing of sensitive data rely on manual processes that cannot cost-effectively address the scope of auditing needed and fail to provide separation of duties from privileged users, such as database and system administrators, who often control and can therefore manipulate audit logs and reports.

 

(1)   Joseph Menn, Fatal System Error: The Hunt for the New Crime Lords Who Are Bringing Down the Internet, p. x (2010).

 

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Increasing complexity of, and open access to, the data center is elevating the risk of attacks that target business data.

We believe that, in order to support evolving business priorities, enterprises continue to deploy new technologies and architectures that are increasing the complexity of, and the accessibility to, the data center. These technologies and architectures broaden the risk associated with business data by creating new points of vulnerability across the data center. Several examples include:

 

  Ÿ  

The widespread use of web-based applications to facilitate complex and sensitive business transactions creates new points of vulnerability from sophisticated attacks that exploit custom application code and business logic.

 

  Ÿ  

The adoption of cloud computing and SaaS models extends the data center beyond the traditional boundaries of the enterprise network and outsources the physical custody of business data to third parties, which results in an increased risk to the data due to the complexity associated with protecting outsourced business systems and controlling the usage of business data in disparate locations.

 

  Ÿ  

The growth of mobile computing is further accelerating the adoption of web applications and extending business processes outside the traditional network perimeter. Additionally, the proliferation of unmanaged mobile devices used by employees with access privileges to sensitive data increases the organization’s vulnerability to attacks.

 

  Ÿ  

The rapid growth of structured and unstructured data throughout organizations, coupled with the dynamic use and copying of this data by numerous users across multiple business systems, increases both the scale and complexity of achieving visibility and control over business data in the data center.

Increasing sophistication, scale and frequency of attacks drive the need for a dedicated layer of security for business data and applications.

Attackers, motivated by the value of business data and encouraged by the growing complexity of, and open access to, the data center, continue to increase the sophistication, scale and frequency of their attacks to steal high-value business data. For example, according to the Verizon 2011 Data Breach Investigations Report dated April 2011, the number of data breaches in 2010 due to internal and external attacks increased 5.4 times from 2009, which approximated the cumulative total of incidents documented from 2004 to 2009. Examples include:

 

  Ÿ  

Large scale, automated external attacks on web applications of organizations of all sizes .    By automatically finding and exploiting weaknesses in any web application, as opposed to targeting a specific web application, industrialized attackers are able to systematically gather valuable data in a scalable and repeatable fashion, resulting in the need for organizations of all sizes to protect high-value business data.

 

  Ÿ  

Sophisticated application and business logic attacks that bypass perimeter network and content security controls.     Several sophisticated technical attack categories, such as SQL injection, cross-site scripting, cross-site request forgery, cookie poisoning and other common attacks, are able to avoid the inspection capabilities of many traditional security products. In addition, attacks on the logic of business applications, such as scraping, application layer denial of service and brute forcing, are crafted to appear as legitimate and are thus able to avoid detection by infrastructure oriented defenses such as network firewalls and intrusion prevention systems.

 

  Ÿ  

Malicious insider attacks that are frequently undetected by traditional internal security controls.     The existence of a robust, illicit market for sensitive data has provided the opportunity and financial incentives for insiders to commit crimes involving the theft and distribution of proprietary data. Since employees, contract workers and business partners need

 

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access privileges to sensitive data in order to carry out their responsibilities, they are able to abuse their privileges and extract high-value business data directly, without triggering internal controls that focus on network and infrastructure activities rather than data access. For example, in 2010, General Motors Corporation was subject to a malicious insider attack when two employees stole sensitive documents relating to hybrid technology worth an estimated $40 million and attempted to sell the data to a Chinese auto manufacturer.

 

  Ÿ  

Attacks originating from trusted insiders compromised by malware that are often undetected by traditional security controls.     In many cases, attacks on data through insiders occur without the insider’s knowledge or collaboration. An insider’s endpoint device may be compromised by malware, which can take control over the device or gain access to its system credentials, allowing an external attacker to then act as a malicious insider and perpetrate an attack on high-value business data. Since internal network and infrastructure solutions do not provide visibility into the usage of data, this malicious interaction with high-value business data remains a blind spot for the organization. The U.S. Office of the Director of National Intelligence reported in February 2011 that almost half of all computers in the United States have been compromised in some manner and that an average of 60,000 new pieces of malware are identified per day.

Need For a Broad Data Security Solution

As a result of these factors, we believe that organizations need a new approach to provide visibility and control over high-value business data across the data center. We believe that effectively addressing data security requires a solution that includes the following:

 

  Ÿ  

a broad and fully integrated platform that monitors and protects high-value business data across various systems in the data center;

 

  Ÿ  

automated capabilities to discover and classify high-value business data;

 

  Ÿ  

user rights management capabilities to ensure data access rights align with corporate policy;

 

  Ÿ  

auditing and reporting capabilities that enable a separation of duties;

 

  Ÿ  

sophisticated attack prevention technologies;

 

  Ÿ  

deployment flexibility though physical, virtual and SaaS offerings to address complex heterogeneous data center environments; and

 

  Ÿ  

integrated and centralized management.

Market Opportunity

We believe that compliance and privacy regulations, large scale and sophisticated external attacks, privilege abuse by malicious insiders and attacks from insiders compromised by advanced malware, all drive the need for a new protection layer positioned closely around the high-value business data and systems in the data center and that existing investments in security and compliance do not address this need:

 

  Ÿ  

perimeter content and network security solutions cannot address malicious insider threats, are not designed to prevent threats from insiders compromised by malware and are often circumvented by sophisticated application and business logic attacks;

 

  Ÿ  

internal network security solutions, such as network firewalls and antivirus software, do not provide visibility and control over data usage; and

 

  Ÿ  

traditional methods of addressing this broad set of requirements result in expensive manual processes that do not scale or provide separation of duties.

 

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According to an IDC report dated February 2011, worldwide spending on IT security products is expected to grow to $38 billion in 2014 from $27 billion in 2010. We believe that only a small fraction of this is spent today on protecting high-value business data in the data center. As a result, we believe data security represents a significant and growing opportunity because the current level of spending to protect high-value business data must dramatically increase in response to the magnitude of the threats to business data.

Our Solution

We are a pioneer and leader of a new category of data security focused on providing visibility and control over high-value business data across critical systems within the data center. We believe most of our customers deploy our solutions as a new layer of data security in addition to traditional security solutions. Our solution includes our SecureSphere Data Security Suite for enterprise data centers and our cloud-based security services designed for mid-market enterprises and SMBs.

Our SecureSphere Data Security Suite is a broad solution designed to protect high-value business data that resides in the data center. Our SecureSphere Data Security Suite is an integrated, modular solution that delivers database, file and web application security and provides organizations with the following benefits:

 

  Ÿ  

Broad and unique solution that protects high-value business data.     Our solution is designed to secure business data across various systems in the data center, from storage within a database or on a file server to consumption through web applications, by monitoring all data usage and business transactions across these systems.

 

  Ÿ  

Automates discovery and classification of high-value business data.     Our solution is designed to enable enterprises to gain visibility and control of business data by automatically identifying and classifying high-value business data, such as financial and credit card data, intellectual property and personally identifiable information, that are typically the focus of security and compliance projects. By identifying the location of high-value business data, our solution enables enterprises to focus the scope of their risk mitigation and regulatory compliance efforts and to reduce the resources required for those projects.

 

  Ÿ  

Enables granular user rights management capabilities to reduce unwarranted data access.     Our solution enables organizations to aggregate and review user rights across multiple database platforms and file systems and to ensure that user access rights are aligned with corporate policy and compliance needs. Our solution is designed to enable an automated, repeatable process for reviewing and reporting on access rights, prevent insiders from accessing high-value business data without a business need-to-know rationale and assist enterprises in accelerating compliance with regulations and other compliance obligations.

 

  Ÿ  

Facilitates large-scale, independent auditing and reporting of access to high-value business data.     Our solution provides visibility into data usage by users and applications to establish an audit trail and control access to high-value business data. Our solution enables critical separation of duties by establishing audit trails that are independent from the database administration team. The reporting capabilities within our solution provide compliance templates as well as interactive audit analytics for fully customizable reporting to address compliance and risk management needs.

 

  Ÿ  

Provides integrated protection against sophisticated threats.     Our solution leverages proprietary technology to dynamically profile application and database usage, correlate security intelligence across our solution, and incorporate threat intelligence from our Application Defense Center (“ADC”) and other third party sources to detect material variances and block advanced persistent threats and application-centric attacks. By inspecting usage activity and transactions across web applications, databases and file servers, our solution detects and

 

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blocks internal and external attacks intended to obtain unauthorized access to high-value business data as well as data access requests that either violate corporate policy or attempt to exploit known vulnerabilities in data center security.

 

  Ÿ  

Delivers flexible deployment models for complex and heterogeneous data center environments .    Our solution is offered as either a physical or virtual appliance to enable flexible deployment in any traditional or virtualized data center. This flexibility enables our SaaS customers, such as salesforce.com, inc., to better protect customer data, and our MSSP and cloud hosting customers, such as Rackspace Hosting, Inc., to offer enhanced data security as a value-added offering to their customers. In addition, we offer cloud-based services that provide on-demand and cost-effective web application firewall capabilities that reduce the need for customers to deploy additional hardware or augment IT staff.

 

  Ÿ  

Significantly improves operational efficiency .    Our solution’s automated capabilities significantly reduce the need for traditional audit and reporting processes to monitor the usage of sensitive data. Our flexible solution automatically adapts to changes in the data center environment without significant ongoing IT administrative resources or manual tuning. In addition, SecureSphere’s centralized platform provides a single point for managing, monitoring and reporting on data security across applications, databases and files in the data center. As a result, our solution enhances operational efficiency and reduces personnel costs, enabling enterprises to scale their data security solutions in a cost-effective manner.

Our solution also includes cloud-based security services that we provide through our majority owned subsidiary, Incapsula, Inc., that deliver on-demand web application security that we believe is cost-effective and reduces the need for customers to deploy additional hardware or augment IT staff.

Our Strategy

Our goal is to extend our leadership position in the data security market. Key elements of our growth strategy include:

 

  Ÿ  

Enhance and extend our leadership position through technological and product innovation.     We intend to continue to invest in product upgrades and product line extensions and to create new products and services that address emerging data security and regulatory compliance requirements. We also plan to invest in advanced threat research, conducted by our ADC, to increase our threat intelligence leadership, and to continue our investments in data security for cloud computing environments. For example, we recently introduced SecureSphere File Activity Monitoring to enable our customers to monitor, audit and control access to high-value business data residing in their unstructured repositories.

 

  Ÿ  

Further penetrate our existing customer base.     We intend to drive further penetration and deployment of our data security suite within our existing customer base. As of September 30, 2011, we had over 1,500 customers in more than 50 countries. Many of our customers initially deploy our solution on a limited portion of their business systems providing us with significant opportunities to sell them more of our products. We have enjoyed success from this strategy as more than 35% of our sales in 2010 were based on repeat sales to existing customers. In addition, as a leading provider of a broad data security solution, we believe we are well positioned to benefit as our customers expand the scope of their data security and compliance initiatives. As of December 31, 2010, approximately 39% of our customers have purchased more than one of our product families.

 

  Ÿ  

Invest in our global distribution network to expand our customer base.     We believe that our hybrid sales model, which combines the leverage of a channel sales model with the account control of a direct sales model, has played an important role in our success to date.

 

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Our hybrid sales model employs a direct touch sales organization and an overlay channel sales team that actively assist our extensive network of channel partners throughout the sales process. We have a network of over 350 channel partners worldwide, including both distributors and resellers, which provide sales and support leverage to our sales organization. In 2010, our channel partners originated over 60%, and fulfilled almost 90%, of our sales. We intend to continue to invest significant resources to further strengthen our existing relationships with channel partners and to expand our network by adding new channel partners. We also plan to expand and develop our relationships with global channel partners, such as Dimension Data plc and Wipro Limited. As we expand our base of partners, we intend to grow our direct touch sales team and enhance our marketing efforts to support our distribution network.

 

  Ÿ  

P ursue data security opportunities as businesses adopt cloud computing.      Our solutions are used to protect thousands of enterprises through cloud-based deployments with our SaaS customers and our MSSP and hosting partners. We intend to continue to focus on capturing the expected increases in spending on securing high-value business data as enterprises pursue cloud computing initiatives. We believe data security is a paramount concern of enterprises as they consider the adoption of cloud computing. Our approach of providing enterprises flexible and scalable data security over a broad range of enterprise cloud strategies has achieved early success. For example, our sales from cloud-based service providers, such as data center hosting vendors, have grown significantly since we first targeted these customers in 2008 and were approximately 7% of our sales in 2010. We intend to develop and expand our relationships with MSSPs and data center hosting providers, such as RackSpace Hosting, Inc. and Savvis, Inc. (which recently agreed to be acquired by CenturyLink, Inc.), and to increase sales to SaaS providers, such as salesforce.com, inc.

 

  Ÿ  

Increase our focus on the mid-market and SMB market.     We believe there is a significant opportunity to provide data security solutions to smaller businesses as they are faced with increasing security threats and compliance mandates. We plan to increase our business with mid-market enterprises and SMBs by expanding our distribution channels and our cloud-based service offering. We recently introduced the Imperva Cloud Web Application Firewall service for the mid-market and the Incapsula service for the SMB market, each of which provide cost-effective data security solutions optimized for the needs of their respective markets.

 

  Ÿ  

Increase awareness of the importance of data security and drive adoption of our solution.     We believe the market for data security is in its early stages and is growing rapidly. We plan to continue to increase market awareness of the benefits of our broad data security solution and invest in our brand so that we can extend our leadership in the data security market. For example, we plan to increase our investments in a broad range of marketing programs, including expanding active tradeshow participation, print advertising, direct marketing, high-profile web events, online advertising initiatives and social media channels such as LinkedIn, Facebook and Twitter.

Products

Our products include our SecureSphere Data Security Suite for enterprise data centers and our cloud-based security services that we provide through Incapsula for mid-market enterprises and SMBs. Our SecureSphere Data Security Suite secures high-value business data across critical systems within the data center from hackers and malicious insiders, provides an accelerated and cost-effective route to address regulatory compliance and establishes a repeatable process for data risk management. Our solution is designed on a common, modular platform that provides centralized management, in-depth analytics and customizable reporting and offers multiple, flexible deployment options that are quick to deploy and easy to scale. Our SecureSphere Data Security Suite incorporates our proprietary dynamic profiling, universal user tracking, transparent inspection and correlated attack validation technologies,

 

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which are described further below. Our solution includes database security, file security and web application security, which we believe differentiate us as providing one of the broadest data security offerings in the marketplace:

 

  Ÿ  

Database Security .    Provides full visibility and control over structured business data repositories, including database data usage, vulnerabilities and access rights and enables security, audit, risk and IT professionals to improve data security and address compliance requirements.

 

  Ÿ  

File Security .    Provides full visibility and control over unstructured business data repositories, including file ownership, usage and access rights and enables security, audit, risk and IT professionals to improve file data security and address compliance requirements.

 

  Ÿ  

Web Application Security .    Protects web applications from large scale cyber attacks, adapts to evolving threats to prevent data breaches and addresses compliance requirements.

LOGO

SecureSphere Web Application Firewall (“WAF”), Database Activity Monitoring and File Activity Monitoring gateways are deployed in the network near the assets they are meant to protect. The File and Database gateways also work in conjunction with SecureSphere Agents that capture activity on the database and file servers themselves. Our broad SecureSphere solution is managed by a centralized management server, which incorporates information from ThreatRader and security updates from the Imperva Application Defense Center (“ADC”).

 

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Database Security

Our database security products are designed to secure high-value business data in structured repositories in the data center. Our database security products are sold as physical or virtual appliances based on the feature and traffic capacity requirements of our customers. We also offer add-on products for our appliances that are sold separately. Our database products cover the following major enterprise database platforms: Oracle, MS-SQL, IBM DB2, Sybase, Informix, MySQL, Progress, Teradata and Netezza.

 

Database Security    Description

Discovery and Assessment Server

  

Ÿ    Automates the process of discovering databases and other business data on the network and performs a security assessment to identify risks to high-value business data

 

Ÿ    Includes assessments for over 1,000 known vulnerabilities and configuration flaws based on proprietary research from our ADC and industry best practices

 

Ÿ     Enables organizations to review and manage their vulnerabilities and accurately scope security and compliance projects

Database Activity Monitoring

  

Ÿ    Includes all Discovery and Assessment Server functionality

 

Ÿ     Delivers real-time, automated, scalable database activity monitoring, auditing and reporting for heterogeneous database environments

Database Firewall

  

Ÿ    Includes Database Activity Monitoring functionality

 

Ÿ     Delivers real-time blocking of external attacks and internal threats from malicious users

User Rights Management for Databases

  

Ÿ    Enables the management of user rights across heterogeneous enterprise databases by aggregating user rights to illustrate what rights users have to business data

 

Ÿ    Secures customer environments by evaluating user rights, eliminating excessive privileges and disabling dormant accounts

 

Ÿ     Enables our customers to comply with regulatory requirements to limit user access rights based on business need to know

ADC Insights

  

Ÿ    Optimized for quick and effective deployment of our SecureSphere database products within organizations running complex enterprise applications such as Oracle E-Business Suite, PeopleSoft and SAP

 

Ÿ    Provides user tracking for identifying the real end-user behind database transactions

 

Ÿ    Includes policies to audit and protect database objects containing sensitive data and assessments for identifying known vulnerabilities

 

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File Security

Our file security products are designed to secure files, including spreadsheets, presentation slides, word processing documents and PDFs containing high-value business data that our customers store in unstructured repositories, such as file servers, network attached storage and storage area network devices. Our file security products are sold as physical or virtual appliances based on feature and traffic capacity requirements of our customers.

 

File Security    Description

User Rights Management for Files

  

Ÿ    Sold as a part of the File Activity Monitoring and File Firewall solutions

 

Ÿ     Enables the management of user access rights across multiple different file storage systems by aggregating user rights based on organizational context and actual file usage to illustrate what rights users have to sensitive files

 

Ÿ    Secures customer environments by evaluating user rights, eliminating excessive privileges and disabling dormant accounts

File Activity Monitoring

  

Ÿ    Includes all User Rights Management for Files functionality

 

Ÿ     Delivers real-time, automated, scalable file activity monitoring, auditing and reporting

 

Ÿ    Creates a detailed audit trail of file access activity, enabling customers to perform interactive audit analytics to identify file activity and user rights problems, measure risk and document compliance with regulatory requirements

File Firewall

  

Ÿ    Includes all File Activity Monitoring functionality, and provides real-time blocking of suspicious activity that violates corporate policies

 

Ÿ    Guards against mistakes introduced at the access control list level

 

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Web Application Security

We believe that our web application firewall (“WAF”) product is one of the industry leading solutions for protecting web assets from application attacks. Our web application security products protect our customers’ applications and high-value business data from application attacks and enable compliance with regulatory requirements. Our web application security products are sold as physical or virtual appliances based on the feature and traffic capacity requirements of our customers. We also offer add-on services for our appliances that are sold separately.

 

Web Application Security     Description

Web Application Firewall

  

Ÿ    Dynamically learns legitimate web application usage

 

Ÿ     Fortifies web defenses with research-driven intelligence on current threats

 

Ÿ    Alerts or blocks requests that:

 

Ÿ    Deviate from normal application and data usage

 

Ÿ    Attempt to exploit known and unknown vulnerabilities

 

Ÿ    Originate from malicious sources

 

Ÿ    Indicate a sophisticated, multi-stage attack

 

Ÿ    Virtually patches application vulnerabilities through integration with web application vulnerability scanners, reducing the window of exposure and impact of ad-hoc application fixes

Our WAF has achieved web application firewall certification and PCI DSS Product Capability Assurance from ICSA Labs, an independent division of Verizon Business which provides third party product assurance and certification for security products and solutions, in November 2010.

Common Product Platform

Our SecureSphere Data Security Suite is built on a common modular platform, which includes a single operating system and common code base. All of the products in our SecureSphere Data Security Suite can be managed either individually as stand-alone appliances or collectively from our SecureSphere MX Management Servers, which provide centralized management, in-depth analytics and customizable reporting. Our SecureSphere MX Management Server product provides a single, centralized point for aggregating and managing SecureSphere security policies, real-time monitoring, logging, auditing and compliance reporting. With our MX server, administrators can simultaneously manage our database, file and web security products from a single console.

Flexible Deployment Options

Our common product platform allows us to offer multiple, flexible deployment options that are quick to deploy and easy to scale. Our platform includes physical and virtual network appliances that can be deployed both inline and non-inline via a variety of networking configurations. Our platform also includes software agents that provide additional ability to monitor local activity on database servers or file storage devices, including the actions of privileged users.

 

  Ÿ  

Hardware Appliances .    Our SecureSphere database security, file security and web application security products are available on five different hardware appliance models that can handle traffic throughput from 100 Mbps to 2Gbps. Our hardware appliances are built on a high performance architecture that allows organizations to manage heavy traffic loads without impacting application or network performance.

 

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  Ÿ  

Virtual Appliances .    SecureSphere virtual appliances provide our full suite of web application, database and file security products in a flexible, easy to install software-only solution. Our virtual appliances operate on VMware, Inc.’s hypervisor, which allows organizations to select their preferred hardware or leverage existing hardware for data center consolidation, to maximize server utilization and reduce power, cooling and support costs. Our virtual appliances offer adaptable, reliable and manageable security for organizations of all sizes that operate VMware, Inc. environments.

 

  Ÿ  

Agents .    For complete visibility into user activity, we offer SecureSphere agents, software that is installed on database or file servers, to extend monitoring, auditing, and enforcement capabilities to these host servers. A single SecureSphere agent can be installed on a server to monitor database activity, file activity or both, and to protect sensitive data with minimal impact to the server performance. Agent communications to the SecureSphere appliance are buffered and encrypted to prevent data loss or compromise. Our database agents can optionally block user activity and quarantine user accounts in the event of a security violation and we expect to add similar blocking capabilities for our file agents in a future product release.

Cloud-Based Services

A key focus of our business and product strategy is to develop hosted security services that we offer as subscriptions in a SaaS delivery model. Our primary cloud-based service offerings are our Incapsula service, the Imperva Cloud WAF Service and our ThreatRadar subscription service.

Incapsula Service

Leveraging our expertise in data security and our investment in intellectual property, our Incapsula service is purpose-built to deliver cloud-based security and content delivery optimization. Our Incapsula service is designed to be easy to deploy and to be accessible to small and medium size businesses that need data security and compliance solutions, but do not have the size or resources to deploy our SecureSphere WAF appliances into their own web site infrastructure. With no requirement to purchase or install any hardware or software to use the Incapsula service, we estimate that most customers can set up the Incapsula service in less than 10 minutes. Our customers begin using the Incapsula service by changing their web site’s Domain Name System setting to route traffic to Incapsula’s network. Incapsula’s global network of servers apply security and optimization solutions to the customers’ web sites’ traffic according to the Incapsula service options purchased by the customer. The screened, filtered and optimized traffic is then routed by the Incapsula network to the customer’s web sites.

Incapsula’s security and optimization offerings currently include the following services:

 

  Ÿ  

Web Application Firewall Services :    provides enterprise-grade blocking of attacks against web applications to help ensure website safety and availability; enhanced security through real-time and centralized threat detection across all protected websites; allows customers to address compliance requirements.

 

  Ÿ  

Content Delivery Optimization :    optimizes website performance by reducing page load times, server load and bandwidth consumption.

 

  Ÿ  

Distributed Denial of Service-Attack Prevention :    blocks malicious attack traffic and allows filtered, legitimate traffic to flow to the customer website allowing its business to run without interruption.

Customers sign up directly with Incapsula to receive the service under different pricing plans, based principally on web site traffic bandwidth. These direct customers operate principally through

 

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Incapsula’s high volume, self service model—provisioning the Incapsula service themselves through Incapsula’s web site and payment processor—and receive basic customer support.

LOGO

 

* A bot is a software application that runs automated tasks over the Internet. While some bots are used for legitimate purposes, such as search engine indexing, many bots are malicious and are used to carry out illicit activity, such as performing distributed denial of service (DDoS) attacks or harvesting application content.
** Scraping is a technique used to extract data from a website, which can be used to collect email addresses, detect changes on competitors’ websites, plagiarize content and gather product and pricing information from rivals. While scraping can be performed by manually copying website content from web browsers, scraping attacks are typically performed by software programs that automatically extract data from websites.

Imperva Cloud WAF Service

For customers that desire a higher level of managed services and customer support, we launched an additional cloud-based service offering in May 2011 targeted at mid-market enterprises. This offering, which we market as the Imperva Cloud WAF powered by Incapsula, bundles the Incapsula service with managed support services from our Security Operations Center (“SOC”). Managed services include provisioning, security alert notifications and tuning, incident response, real time service dashboard and statistics, customer support and weekly reports on alerts and attack trends.

ThreatRadar

ThreatRadar is an add-on, premium subscription service for our SecureSphere WAF appliance that recognizes attack sources and dynamically adjusts web security policies within our SecureSphere WAF appliance to provide protection against them. These attack sources may include known malicious

 

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traffic sources that have attacked other web applications, anonymous proxies that may be used by hackers to launch attacks, traffic sources that launch anonymous attacks and phishing URLs. Our dedicated security research team, the ADC, globally tracks these different attack sources and compiles this information with third-party research on malicious sources into the ThreatRadar feed.

Security Operations Center

We offer our hosting partners that deploy our SecureSphere WAF appliances and Imperva Cloud WAF customers remotely managed security services through our team of specialized data security professionals in our SOC in Tel Aviv, Israel. For our hosting partners, our SOC remotely configures provisions, manages and monitors our SecureSphere WAF appliance in our hosting partners’ data centers; provides maintenance updates, patch management and backups; and delivers daily or weekly reports, real-time alerts and incident responses for suspicious activities. Our SOC services for our hosting partners also include customized rules, alerts, reports and dashboards to enable quick and cost effective steps towards compliance and security. While our SOC currently only provides managed security services to our hosting partners for our SecureSphere WAF appliances, we anticipate that in the future our SOC services will also support our database activity monitoring and file activity monitoring products.

Technology

Our SecureSphere Data Security Suite provides our customers with a single unified platform for protecting sensitive data from hackers and malicious insiders, providing a fast and cost-effective route to regulatory compliance and establishing a repeatable process for data risk management. Our solution includes the proprietary technologies described below.

Dynamic Profiling

Our dynamic profiling technology allows customers to create and monitor security policies based on actual application and database behavior. Data security requires an understanding of hundreds of thousands of constantly changing variables including URLs, parameters, cookies, queries, commands and stored procedures. Our dynamic profiling technology automatically profiles all of these application and database elements by examining live application and database traffic and builds a baseline of acceptable user behavior. By building an accurate profile or “white list” of acceptable application and database usage, our dynamic profiling technology streamlines monitoring and security configuration. Our dynamic profiling technology also automatically recognizes valid application and database changes over time and automatically updates the profile according to these application and database changes, ensuring that security policies are current. This profile can be viewed by the application development or database security teams and may be manually modified to bridge any differences between actual usage and corporate security policies.

Universal User Tracking

Our universal user tracking technology helps customers achieve the primary requirements of any audit and security process by tracking the individual end user that accessed or modified business data. Often, when users access databases via a web application, connections are pooled by the application server into a single connection to the database. Typical database auditing systems do not consistently link database activity with specific users when connection pooling is in use because only the application’s login name is recorded. Our universal user tracking technology tracks individual user connections, not just application logins, to provide full database audit accountability. Our universal user tracking incorporates multiple tracking methods to establish end user accountability for every database transaction, even in connection pooling environments. These methods include web application user

 

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tracking, web to database user tracking, SQL connection user tracking and direct user tracking that collectively enable our solution to audit end users regardless of how they connect to the database, enabling complete accountability. By tracking end users, our solution can display user IDs in database security alerts, audit logs and reports. In addition, database security policies can be created to restrict access by user ID. Our universal user tracking technology provides greater visibility into database activity and more granular security controls than typical database auditing systems and facilitates adherence to today’s stringent regulatory requirements.

Transparent Inspection

Our transparent inspection technology provides application layer security without needing to intermediate web connections. This technology allows our solution to inspect traffic without compromising performance, latency or availability. Our transparent inspection technology intercepts packets without modifying them and reconstructs web and SQL transactions without needing to terminate connections. This means our solution can be easily deployed in an enterprise’s data centers without any changes to the existing network architecture.

Correlated Attack Validation

Our correlated attack validation technology provides our customers with protection against malicious activity by analyzing multiple data points, tracking events over time and correlating disparate events to identify and block sophisticated attacks. This technology examines multiple pieces of information at the network, protocol and application level immediately and over time to distinguish between attacks and valid user traffic. By basing decisions on multiple observations rather than a single event, our correlated attack validation technology delivers a highly accurate and automated defense system against application attacks and abuse that provides protection against today’s complex, multi-vector attacks.

Services

Maintenance and Support

We offer our customers ongoing product support services for both hardware and software. These maintenance programs are typically sold to customers for one to three-year terms at the time of the initial product sale and typically renew for successive one to three-year periods. We offer a premium level of service which includes advance replacement and greater call center availability. While some of our channel partners provide tier one support, including MSSPs and data center hosting providers, in most instances we provide tier one level support and above.

Our ADC updates are included with maintenance and support contracts. The service consists of a content delivery mechanism by which we can distribute product content enhancements to our customers. Our ADC update servers deliver various types of security content to our appliances deployed in the field without the need for our customers to install a software patch or upgrade. Examples of ADC updates include new security signatures and policies for our WAF, new database assessment tests for our discovery and assessment server and new audit policy functionality for our database products.

Professional Services and Training

Our professional services consultants assist our customers in the deployment and configuration of our products. These fee-based services, provided by our professional services consultants, include providing advice on deployment planning, network design, product configuration and implementation, automating and customizing reports and tuning policies and configuration of our products for the

 

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particular characteristics of the customer’s environment. Additionally, we provide our customers with fee-based, hands-on training classes for our solution that are offered regularly and in different parts of the world.

Customers

We provide products and services to a variety of customers worldwide, including some of the world’s largest banks, retailers, insurers, technology and telecommunication companies, hospitals, as well as U.S. and other national, state and local government agencies. As of September 30, 2011, we had over 1,500 customers in more than 50 countries. In addition, our solutions are used to protect thousands of organizations through cloud-based deployments with our SaaS customers and our MSSP and hosting partners. Our customers include four of the top five telecommunications companies, three of the top five commercial banks in the United States, three of the top five financial data service firms, three of the top five computer hardware companies, two of the top five food and drug store companies in the United States, over 150 government agencies around the world and more than 100 Fortune 1000 companies.

Our customer base is broad and diversified across multiple geographies and industry verticals, including banking and finance, government and military, technology, telecom, healthcare and retail. Since 2004, no customer has accounted for more than 10% of our sales in any year. In 2008, 2009 and 2010, we generated approximately 68%, 63% and 66% of our revenue from customers in the Americas and approximately 32%, 37% and 34% from customers outside of the Americas, respectively.

Sales and Marketing

We believe that our hybrid sales model, which combines the leverage of a channel sales model with the account control of a direct sales model, has played an important role in our success to date. Our hybrid model employs a direct touch sales organization and an overlay channel sales team that actively assist our extensive network of channel partners throughout the sales process. We primarily sell our products and services to our customers through our channel partners, including distributors and resellers. In 2010, our channel partners originated over 60% of our sales and fulfilled almost 90% of our sales. Although our products are designed for turnkey deployment, they are highly customizable, which allows our channel partners to provide a variety of value added services to our customers. We employ a direct touch sales organization to work closely with our channel partners on customer outreach efforts and a channel overlay organization to manage our channel partners. As of September 30, 2011, our network of channel partners included more than 350 resellers and distributors worldwide. We work with many global channel partners, such as Dimension Data plc and Wipro Limited, and leading security value added resellers, including Accuvant, Inc., FishNet Security, Inc. and Integralis AG. Our MSSP partners include some of the largest hosting companies including Rackspace Hosting, Inc., Savvis, Inc. (which recently agreed to be acquired by CenturyLink, Inc.) and Dell, Inc. (formerly SecureWorks, Inc.).

Sales

We support the sales of our products and services with a team of experienced channel account managers, sales professionals and sales engineers who provide business planning, joint marketing strategy, and pre-sales and operational sales support. Our overlay channel team is responsible for managing relationships with our resellers, MSSPs and distributors. Our sales professionals are responsible for assisting channel partners in gaining and supporting key customer accounts and acting as liaisons between the end customers and our marketing and product development organizations. Our sales professionals and sales engineers typically work alongside our channel partners and directly engage with customers to address their unique security and deployment requirements. We also have an inside sales team that is principally focused on lead generation for our reseller partners and regional sales professionals.

 

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To support our broadly dispersed global channel and customer base, we have, as of September 30, 2011, sales personnel in 20 countries. We plan to invest in our sales organization to support the growth of our channel partners.

Marketing

Our marketing strategy is focused on building our brand and driving customer demand for our security solutions. We execute this strategy by leveraging a combination of internal marketing professionals and a network of regional and global channel partners. Our internal marketing organization is responsible for branding, and product marketing and works with our business operations team to support channel marketing and sales support programs. We focus our resources on programs, tools and activities that can be leveraged by partners worldwide to extend our marketing reach, such as sales tools and collateral, information regarding product awards and technical certifications, training, regional seminars and conferences, webinars and various other demand-generation activities. Our marketing efforts also include public relations and our web site, including our data security blog.

Research and Development

Our research and development efforts are focused primarily on improving and enhancing our existing data security products and services, as well as developing new products, features, and functionality and conducting advanced security research. We conduct our research and development activities in Israel, and we believe this provides us with access to some of the best engineering talent in the security industry. As of September 30, 2011, we had 134 employees dedicated to research and development, including our advanced security research group, the ADC.

When considering product improvements and enhancements, we communicate with our customers and partners who provide significant feedback for product development and innovation. We regularly release new versions of our products incorporating these improvements and enhancements. Our research and development team works with our customer support group to resolve escalated support issues by providing consultation, bug fixes and patches. Our research and development team also provides technical assistance to our other departments, including to our sales team by overseeing product pilots for potential customers.

In addition to enhancing our products and services, our research and development organization is made up of our engineering team and our advanced security research group, the ADC. We believe our ADC is an important differentiator for us in the security marketplace. Our ADC team performs security analysis, tracks hackers and trends in the hacker community and undertakes vulnerability discovery, in addition to providing us with regulatory compliance expertise. ADC research combines extensive lab work with hands-on testing in real world environments to ensure that our products, through advanced data security technology, deliver up-to-date threat protection and leading compliance automation. Our ADC has discovered numerous commercial application vulnerabilities and has issued numerous security advisories, providing insight into both published and unpublished security threats to help commercial application and database vendors and security professionals. Our ADC’s “Hacker Intelligence Initiative” focuses on improving risk management by tracking hackers, developments in attack techniques and potential targets in known hacker forums and chat rooms. The ADC’s research is also the foundation for many of our solution’s features and services, including attack signature updates, database vulnerability assessments and pre-defined compliance reports. We deliver automated feeds from our ADC to our products in the field to ensure that our customers are always armed with the latest defenses against new threats, and the most recent regulatory compliance best practices.

 

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Our research and development expense was $8.6 million, $10.5 million and $13.2 million in 2008, 2009 and 2010, respectively, and $12.9 million during the nine months ended September 30, 2011.

Intellectual Property

To protect our intellectual property, both domestically and abroad, we rely primarily on patent, trademark, copyright and trade secret laws. As of September 30, 2011, we had four issued patents and nine pending patent applications in the United States. The claims for which we have sought patent protection relate primarily to methods, computer programs, devices and systems we have developed for our products. We also license software from third parties for integration into our products, including open source software and other software available on commercially reasonable terms.

Despite our efforts to protect our proprietary technologies and our intellectual property rights, unauthorized parties may attempt to copy aspects of our products or obtain and use our trade secrets or other confidential information. We generally enter into confidentiality agreements with our employees, consultants, vendors and customers, and generally limit access to and distribution of our proprietary information and proprietary technology. These agreements may not effectively prevent unauthorized use or disclosure of our intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our intellectual property or technology. We cannot assure you that the steps taken by us will prevent misappropriation of our trade secrets or technology. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States.

Our industry is characterized by the existence of a large number of relevant patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in the security industry have extensive patent portfolios. From time to time, third parties, including certain of these leading companies, have asserted and may assert patent, copyright, trademark and other intellectual property rights against us, our channel partners or our customers. Successful claims of infringement by a third party could prevent us from distributing certain products or performing certain services or require us to pay substantial damages (including treble damages if we are found to have willfully infringed patents or copyrights), royalties or other fees. Such claims also could require us to cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others, or to expend additional development resources to attempt to redesign our products or services or otherwise to develop non-infringing technology; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property rights; and to indemnify our partners and other third parties. Even if third parties may offer a license to their technology, the terms of any offered license may not be acceptable and the failure to obtain a license or the costs associated with any license could cause our business, operating results or financial condition to be materially and adversely affected. We typically indemnify our customers and distributors against claims that our products infringe the intellectual property of third parties.

Manufacturing and Suppliers

Our security hardware appliance products are manufactured to our specifications by Caswell, Inc., a Taiwanese original design manufacturer of network appliance hardware products. We have entered into non-exclusive contracts to purchase these hardware appliances from American Portwell Technology, Inc. (a wholly owned subsidiary of Portwell, Inc.), and Dan-el Technologies Ltd., which are value-added distributors of products manufactured by Caswell, Inc. These contracts will remain in effect until terminated by either party. Such contracts are terminable by us for any reason upon six months notice, by the value-added distributors upon nine months notice or by either party for an uncured material breach. We provide the value-added distributors with rolling product demand

 

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forecasts, but our contracts contain no obligation for us to purchase any minimum amount of products. We submit purchase orders to these value-added distributors that describe the types and quantities of our products to be manufactured, the delivery dates and other delivery terms. Our value-added distributors receive the hardware appliances from the manufacturer and configure and install our proprietary software on the appliances and then undertake quality testing at their fulfillment centers. Our value-added distributors then ship our appliances directly to our distributors, resellers or customers or our logistic partner, Base Logistics BV. We hold inventory in our value-added distributors’ fulfillment centers and in our logistic partner’s warehouses, in anticipation of orders for new appliances and to support our advance replacement program with new and repaired appliances. In addition, our contracts with these value-added distributors govern their use of our intellectual property and allocate the responsibilities for warranty repair, out of warranty repair and replacement costs with respect to damaged and defective products. We believe that having third parties manufacture, configure and test our products and provide a substantial portion of our logistics enables us to efficiently allocate capital, better adjust manufacturing volumes to meet changes in demand and more quickly deliver products, allowing us to focus resources on our core competencies.

The hardware components included in our products are sourced from various suppliers by our manufacturer and are principally industry standard parts and components that are available from multiple vendors. We have limited sources of supply for certain key components of our products, such as semiconductors, printed circuit boards and hard disk drives, which exposes us to the risk of component shortages or unavailability. For more information on risks related to product manufacturing and availability of components, see the section entitled “Risk Factors–Risks Related to Our Business–Delays or interruptions in the manufacturing and delivery of SecureSphere appliances by our sole source manufacturer may harm our business.”

Competition

The market for data security solutions is intensely competitive and we expect competition to increase in the future. Our primary competitors by product area include:

 

  Ÿ  

Database security.     International Business Machines Corporation (through its acquisition of Guardium, Inc.), McAfee, Inc., a subsidiary of Intel Corporation (through its recent acquisition of Sentrigo, Inc.) and Oracle Corporation (through its acquisition of Secerno Ltd.)

 

  Ÿ  

File security.     EMC Corporation and Symantec Corporation

 

  Ÿ  

Web application security.     Citrix Systems, Inc. and F5 Networks, Inc.

We believe that the principal competitive factors affecting the market for data security solutions include breadth of product offerings, security effectiveness, manageability, reporting, technical features, performance, ease of use, price, professional services capabilities, distribution relationships and customer service and support. We believe that our solutions generally compete favorably with respect to such factors.

Properties

Our corporate headquarters are located in Redwood Shores, California in an office consisting of approximately 26,000 sq. ft. The lease for this office expires in March 2014. Our office in Tel Aviv, Israel, where we employ our research and development team, consists of approximately 4,100 sq. meters (approximately 44,000 sq. ft.) and the lease for this office begins to expire for portions of this office in December 2013. We also lease sales offices in Japan, New York and Singapore. We believe that our facilities are suitable to meet our needs for the foreseeable future; however, we will continue to seek additional space as needed to accommodate our growth.

 

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Employees

As of September 30, 2011, our total headcount was 375 employees, with 134 in research and development, 140 in sales and marketing, 49 in services and support, 4 in manufacturing operations and 48 in a general and administrative capacity. As of September 30, 2011, our headcount was 152 people in the United States, 183 in Israel and 40 in other countries. None of our employees is represented by a labor union with respect to his or her employment with us. We have not experienced any work stoppages, and we consider our relations with our employees to be good.

Legal Proceedings

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently a party to any material litigation, however, we have received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. In May 2010, F5 Networks, Inc., an IT infrastructure company that competes with us in the web application firewall market, filed a lawsuit against us alleging patent infringement. In June 2010, we filed a counterclaim alleging patent infringement by F5 Networks, Inc. In February 2011, we entered into a settlement and license agreement with F5 Networks, Inc., which dismissed the litigation. Future litigation may be necessary to defend ourselves, our channel partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights or to establish our proprietary rights.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth information regarding our directors and executive officers, including their ages as of September 30, 2011.

 

Name

   Age     

Position

Shlomo Kramer

     45       President, Chief Executive Officer and Director

Terrence J. Schmid

     47       Chief Financial Officer and Treasurer

Amichai Shulman

     42       Chief Technology Officer

Jason Forget

     38       Vice President, Business Operations

Prashant K. Karnik

     55       Vice President, Worldwide Client Services

Mark E. Kraynak

     38       Vice President, Worldwide Marketing

Trâm T. Phi

     41       Vice President and General Counsel

Ralph Pisani

     41       Vice President, Worldwide Sales

Yaniv Shaya

     41       Vice President, Engineering

Michael Boodaei

     39       Director

Asheem Chandna(3)

     47       Director

Theresia Gouw Ranzetta(1)(3)

     43       Director

Steven Krausz(1)(2)

     56       Director

Albert A. Pimentel(2)

     56       Director

Frank Slootman(3)

     52       Director

David N. Strohm(2)

     63       Director

 

(1) Member of nominating and corporate governance committee.
(2) Member of audit committee.
(3) Member of compensation committee.

Shlomo Kramer is our co-founder and has served as chairman of the board of directors since our inception in April 2002 and as our President and Chief Executive Officer since May 2002. Mr. Kramer has also served as a member of the board of directors of our majority owned subsidiary, Incapsula, Inc., since 2009. Prior to founding Imperva, Mr. Kramer co-founded Check Point Software Technologies Ltd., an enterprise security software company, in 1993, where he held various executive roles through 1998 and served as a member of the board of directors through 2003. Mr. Kramer is also an active investor and current board member of a number of privately held companies in the security and enterprise software industries. Mr. Kramer holds a B.S. in mathematics and computer science from Tel Aviv University and an M.S. in computer science from Hebrew University of Jerusalem.

The board of directors believes that Mr. Kramer possesses specific attributes that qualify him to serve as a director, including the perspective and experience he brings as our Chief Executive Officer, one of our founders, and a large stockholder. The board of directors also believes that Mr. Kramer brings historical knowledge, operational expertise and continuity to the board of directors.

Terrence J. Schmid has served as our Chief Financial Officer and Treasurer since November 2010. Prior to that, from April 2009 to November 2010, Mr. Schmid was the Chief Financial Officer for Coremetrics, Inc. (acquired by IBM), a provider of marketing optimization software. From November 2006 to April 2009, Mr. Schmid was the Executive Vice President and Chief Financial Officer for Enterasys

 

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Networks, Inc., a provider of wired and wireless infrastructure and security solutions. Mr. Schmid holds a B.A. in economics from the University of San Francisco and an M.B.A. from Duke University.

Amichai Shulman is our co-founder and has served as the Chief Technology Officer of Imperva Ltd., our Israeli subsidiary, since May 2002. Mr. Shulman has also served as our Secretary from May 2002 to October 2010. Prior to founding Imperva, from 2000 to 2002, Mr. Shulman was a founder and Chief Technology Officer of eDvice Security Services Ltd., an application and database security consulting group. Mr. Shulman holds a B.Sc. and an M.S. in computer science from Technion, Israel Institute of Technology where he currently serves as an adjunct faculty member in the Computer Science department.

Jason Forget has served as our Vice President, Business Operations since July 2010. Prior to that, he served as our Vice President, Field Operations from January 2010 to July 2010; our Vice President, Corporate Sales from January 2009 to January 2010; our Senior Director, Sales Operations from January 2008 to January 2009 and our Director, Sales Operations from May 2006 to January 2008. Mr. Forget holds a B.S. in finance and marketing from Northeastern University and an M.B.A. from Bentley College.

Prashant K. Karnik has served as our Vice President, Worldwide Client Services since February 2011. Prior to that, from June 2010 to February 2011, Mr. Karnik was an independent management consultant for InfoGain Corporation, where he advised the chief executive officer and the executive team in matters of global strategy and solutions in cloud computing and mobility. From August 2006 through May 2010, Mr. Karnik served as Senior Vice President and General Manager for Chordiant, Inc. (acquired by Pegasystems Inc.), a global customer relationship management solution provider. From June 2005 to August 2006, Mr. Karnik was Senior Vice President, Worldwide Professional Services and Offshore Operations at Dorado, Inc., a solution provider for the mortgage industry. Mr. Karnik holds a B.S. in mechanical engineering from National Institute of Technology, India, an M.S. in industrial engineering and operations research from Rutgers University and an M.B.A. from Southern New Hampshire University.

Mark E. Kraynak has served as our Vice President, Worldwide Marketing since December 2008. Prior to that, he served as our Senior Director, Strategic Marketing from July 2007 to December 2008; Director, Product Marketing from September 2004 to July 2007 and Senior Product Marketing Manager from June 2004 to September 2004. Mr. Kraynak has also served as a director of our subsidiary, Incapsula, Inc., since November 2009. Mr. Kraynak holds a B.Sc. in electrical engineering and a B.A. in English from Duke University and an M.F.A. in Literature from American University.

Trâm T. Phi has served as our Vice President, General Counsel and Corporate Secretary since August 2011. Ms. Phi served as Vice President, General Counsel and Secretary of ArcSight, Inc., a provider of enterprise threat and risk management solutions, from January 2006 to August 2011. From September 2002 to May 2005, Ms. Phi served in various positions at InVision Technologies, Inc., a manufacturer of explosives detection systems, most recently as Senior Vice President and General Counsel, including following the acquisition of InVision by General Electric Company in December 2004. From 1995 to September 2002, she was an associate at Fenwick & West LLP, a high technology law firm. Ms. Phi holds a B.A. in political science from San Jose State University and a J.D. from the University of California, Berkeley, School of Law (Boalt Hall).

Ralph Pisani has served as our Vice President, Worldwide Sales since July 2010. Prior to that, he served as our Vice President, Americas Sales from January 2009 to July 2010 and as our Vice President, North American East Sales from February 2008 to January 2009. From August 2006 to February 2008, Mr. Pisani was the Vice President, OEM Sales for Secure Computing Corporation (acquired by McAfee, Inc.), a provider of computer security appliances. From December 2003 to

 

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August 2006, Mr. Pisani served as the Vice President of Channel and Business Development and then as Vice President of Sales, East Region for CipherTrust, Inc., an email security company (acquired by Secure Computing Corporation). Mr. Pisani holds a B.A. in business from Bentley College.

Yaniv Shaya has served as the Vice President, Engineering of Imperva, Ltd., our Israeli subsidiary, since August 2009. Prior to that, from April 2005 to August 2009, Mr. Shaya was a Director of Research and Development for Mercury Interactive Corp. (acquired by Hewlett-Packard Company), an IT management software and services company. Mr. Shaya holds a B.Sc. in electrical engineering from Technion, Israel Institute of Technology and an M.B.A. from Tel Aviv University.

Michael Boodaei is our co-founder and has served as a member of our board of directors since our inception in April 2002. Beginning in July 2006 through the present, Mr. Boodaei has been the co-founder and Chief Executive Officer of Trusteer, Inc., a provider of secure web access services. Previously, Mr. Boodaei served as our Vice President, Europe, Middle East and Africa Sales and Vice President, Product Management from January 2005 to July 2006 and from April 2002 to January 2005, respectively. Prior to that, from 2000 to 2002, Mr. Boodaei was the founder and Chief Executive Officer of eDvice Security Services Ltd., an application and database security consulting group. Mr. Boodaei holds a B.Sc. in computer engineering from Technion, Israel Institute of Technology and an M.B.A. from Ben-Gurion University.

The board of directors believes that Mr. Boodaei possesses specific attributes that qualify him to serve as a director, including his long history with Imperva, his extensive experience in the internet security industry and his deep expertise in security technologies.

Asheem Chandna has served as a member of our board of directors since July 2003. Currently, Mr. Chandna is a Partner at Greylock Partners, where he focuses on investments in enterprise IT, including security products. Mr. Chandna currently also serves as a board member of several privately held companies that are portfolio companies of Greylock Partners. From April 2003 to October 2009, Mr. Chandna was a director of Sourcefire, Inc. Prior to Greylock Partners, Mr. Chandna was Vice President, Business Development and Product Management for Check Point Software Technologies Ltd. from 1996 to 2002. Mr. Chandna holds a B.S. and an M.S. in electrical and computer engineering from Case Western Reserve University.

The board of directors believes that Mr. Chandna possesses specific attributes that qualify him to serve as a director, including his specific professional experience with security products while at Check Point Software Technologies Ltd. as well as his extensive background with enterprise IT companies, and public and private company board member experience.

Theresia Gouw Ranzetta has served as a member of our board of directors since May 2002. Currently, Ms. Ranzetta is a Partner at Accel Partners, which she joined in 1999, where she focuses on software investments, with a specific interest in social commerce, vertical media, security and consumer internet/mobile applications. Ms. Ranzetta currently also serves as a board member of various software and technology companies that are portfolio companies of Accel Partners, as well as the National Venture Capital Association. Ms. Ranzetta holds a Sc.B. in engineering from Brown University and an M.B.A. from Stanford University.

The board of directors believes that Ms. Ranzetta possesses specific attributes that qualify her to serve as a director, including her substantial experience in the software and technology industry as an investment professional, an executive and a member of the boards of directors of other companies in such industries.

Steven Krausz has served as a member of our board of directors since May 2003. Currently, Mr. Krausz is a Managing Member at U.S. Venture Partners, which he joined in 1985, where he

 

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specializes in communications, internet infrastructure, networking and enterprise software investments. Mr. Krausz currently also serves on the board of directors of several portfolio companies of U.S. Venture Partners, the Western Association of Venture Capitalists, the World Affairs Council and the Stanford GSB Trust. Mr. Krausz was also a director of Occam Networks, Inc., from 2000 until its acquisition by Calix, Inc. in February 2011. He is also a former board member and treasurer of the National Venture Capital Association. Mr. Krausz holds a B.S. in electrical engineering and an M.B.A. from Stanford University.

The board of directors believes that Mr. Krausz possesses specific attributes that qualify him to serve as a director, including his extensive experience as an investment professional and director of various companies in the industry, as well as his technical expertise.

Albert A. Pimentel has served as a member of our board of directors since June 2010. Currently, Mr. Pimentel is Executive Vice President, Chief Sales and Marketing Officer for Seagate Technology PLC, one of the world’s largest manufacturers of storage devices. From March 2009 until April 2011, Mr. Pimentel served on Seagate Technology PLC’s board of directors. Mr. Pimentel has served as a member of the board of directors of Xilinx Corporation since August 2010. From May 2008 to August 2010, Mr. Pimentel also served as the Chief Operating Officer and Chief Financial Officer for McAfee, Inc., a leading company in the field of consumer and enterprise digital security products. From October 2004 to April 2008, Mr. Pimentel was the Executive Vice President and Chief Financial Officer for Glu Mobile, Inc., a global publisher of mobile games. From September 2003 to April 2004, Mr. Pimentel was the Executive Vice President and Chief Financial Officer of Zone Labs, Inc., a provider of end-point security software which was acquired by Check Point Software Technologies Ltd. in March 2004. From 2001 to 2003, Mr. Pimentel was a partner with Redpoint Ventures. Mr. Pimentel holds a B.S. in commerce from Santa Clara University.

The board of directors believes that Mr. Pimentel possesses specific attributes that qualify him to serve as a director, including his extensive industry experience and financial and operational expertise.

Frank Slootman has served as a member of our board of directors since August 2011. Mr. Slootman currently is, and has been since May 2011, the President and Chief Executive Officer of Service-Now.com, a provider of a comprehensive suite of cloud-based services for enterprise IT management. Prior to Service-Now.com, from August 2009 to December 2010, Mr. Slootman was Executive Vice President for EMC Corporation. Before that, from July 2003 to July 2009, Mr. Slootman served as President and Chief Executive Officer of Data Domain, Inc., and as one of its directors from July 2003 to July 2009. Mr. Slootman holds undergraduate and graduate degrees in economics from Erasmus University in Holland.

The board of directors believes that Mr. Slootman possesses specific attributes that qualify him to serve as a director, including his specific professional experience with enterprise software technologies while at Service-Now.com, EMC Corporation and Data Domain, Inc.

David N. Strohm has served as a member of our board of directors since August 2011. Mr. Strohm has been affiliated with Greylock Partners since 1980, where he has served as a Partner since January 2001, and previously served as a General Partner from 1983 to 2001. Mr. Strohm currently also serves as a director of EMC Corporation, where he has served since 2003, VMware, Inc., where he has served since 2007, and several private companies. Mr. Strohm was previously a director of DoubleClick, Inc. from 1997 to 2005, Internet Security Systems, Inc. from 1996 to 2006, and SuccessFactors, Inc. from 2001 to November 2010. Mr. Strohm holds a B.A. from Dartmouth College and an M.B.A from Harvard Business School.

The board of directors believes that Mr. Strohm possesses specific attributes that qualify him to serve as a director, including his extensive experience as an investment professional in the industry and as a director of various companies, many of which are publicly traded.

 

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Board Composition

Upon completion of this offering, our board of directors will consist of eight directors, six of whom will qualify as “independent” directors according to the rules and regulations of the New York Stock Exchange. Our restated certificate of incorporation, which will be effective upon the completion of this offering, will provide for a classified board of directors divided into three classes with members of each class of directors serving staggered three-year terms. As a result, a portion of our board of directors will be elected each year. Mr. Boodaei, Mr. Chandna and Mr. Krausz have been designated Class I directors whose term will expire at the first annual meeting of stockholders following the closing of this offering. Ms. Ranzetta, Mr. Slootman and Mr. Strohm have been designated Class II directors whose term will expire at the second annual meeting of stockholders following the closing of this offering. Mr. Kramer and Mr. Pimentel have been designated Class III directors whose term will expire at the third annual meeting of stockholders following the closing of this offering.

Our restated certificate of incorporation will also provide that that the number of authorized directors will be determined from time to time by resolution of a majority of the total authorized number of directors and any vacancies in our board and newly created directorships may be filled only by a majority of the directors then in office, unless otherwise determined by the board to be filled by stockholders. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes, so that, as nearly as possible, each class will consist of one-third of the total number of directors. Our restated certificate of incorporation will further provide for the removal of a director only for cause and by the affirmative vote of the holders of 75% or more of the shares then entitled to vote at an election of our directors. These provisions and the classification of our board of directors may have the effect of delaying or preventing changes in the control or management of Imperva.

Each of our directors currently serves on our board of directors pursuant to a voting agreement, which will terminate upon the closing of this offering. There are no family relationships among any of our directors or executive officers.

Our board of directors has considered the relationships of all directors and, where applicable, the transactions involving them described below under “Certain Relationships and Related Person Transactions,” and determined that each of them does not have any relationship which would interfere with the exercise of independent judgment in carrying out his or her responsibility as a director and that each non-employee director qualifies as an independent director under the applicable rules of the New York Stock Exchange.

Committees of the Board of Directors

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee, each of which operates pursuant to a separate charter adopted by our board of directors. The composition and functioning of our board of directors and all of our committees will comply with all applicable requirements of the Sarbanes-Oxley Act of 2002, the New York Stock Exchange and SEC rules and regulations. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board.

Audit Committee

Upon completion of this offering, our audit committee shall consist of Mr. Krausz, Mr. Pimentel and Mr. Strohm, with Mr. Pimentel chairing the audit committee. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the New York Stock Exchange. Our board has determined that Mr. Pimentel is an “audit committee

 

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financial expert” as defined under the applicable rules of the SEC and has the requisite financial sophistication as defined under the applicable rules and regulations of the New York Stock Exchange. Mr. Krausz, Mr. Pimentel and Mr. Strohm are independent directors as defined under the applicable rules and regulations of the SEC and the New York Stock Exchange. The audit committee will operate under a written charter that will satisfy the applicable standards of the SEC and the New York Stock Exchange.

The audit committee’s responsibilities include:

 

  Ÿ  

appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm;

 

  Ÿ  

pre-approving auditing and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm;

 

  Ÿ  

reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures;

 

  Ÿ  

coordinating the oversight and reviewing the adequacy of our internal control over financial reporting;

 

  Ÿ  

establishing policies and procedures for the receipt, retention and treatment of accounting-related complaints and concerns; and

 

  Ÿ  

preparing the audit committee report required by SEC rules to be included in our annual proxy statement.

Compensation Committee

Upon completion of this offering, our compensation committee shall consist of Mr. Chandna, Ms. Ranzetta and Mr. Slootman, with Mr. Slootman chairing the compensation committee. All of the members of our compensation committee are independent under the applicable rules and regulations of the SEC, the New York Stock Exchange and the Internal Revenue Code.

The compensation committee’s responsibilities include:

 

  Ÿ  

annually reviewing and approving corporate goals and objectives relevant to compensation of our chief executive officer;

 

  Ÿ  

evaluating the performance of our chief executive officer in light of such corporate goals and objectives and determining the compensation of our chief executive officer;

 

  Ÿ  

recommending to the board the compensation of all our other officers;

 

  Ÿ  

overseeing and administering our incentive-based compensation and equity plans; and

 

  Ÿ  

reviewing and making recommendations to the board with respect to director compensation.

Nominating and Corporate Governance Committee

Upon completion of this offering, our nominating and corporate governance committee shall consist of Mr. Krausz and Ms. Ranzetta, with Ms. Ranzetta chairing the nominating and corporate governance committee. All of the members of our nominating and corporate governance committee are independent under the applicable rules and regulations of the SEC and the New York Stock Exchange.

The nominating and corporate governance committee’s responsibilities include:

 

  Ÿ  

developing and recommending to the board criteria for selecting board and committee membership;

 

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  Ÿ  

establishing procedures for identifying and evaluating director candidates including nominees recommended by stockholders;

 

  Ÿ  

identifying individuals qualified to become board members;

 

  Ÿ  

recommending to the board the persons to be nominated for election as directors and to each of the board’s committees;

 

  Ÿ  

developing and recommending to the board a code of business conduct and ethics and a set of corporate governance guidelines; and

 

  Ÿ  

overseeing the evaluation of the board, its committees and management.

Compensation Committee Interlocks and Insider Participation

None of the members of the compensation committee is or has at any time during the past fiscal year been an officer or employee of the Company. None of the members of the compensation committee has formerly been an officer of the Company. Mr. Kramer, our President and Chief Executive Officer, serves as a member of the board of directors of Trusteer, Inc., and Mr. Boodaei, the Chief Executive Officer of Trusteer, Inc. serves on our board of directors. Except as disclosed in the preceding sentence, none of the executive officers of the Company serve or in the past fiscal year has served as a member of the board of directors or compensation committee of any other entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

 

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COMPENSATION

Compensation Discussion and Analysis

This Compensation Discussion and Analysis provides information about the material components of our executive compensation program for:

 

  Ÿ  

Shlomo Kramer, our President and Chief Executive Officer (our “CEO”);

 

  Ÿ  

Terrence J. Schmid, our Chief Financial Officer and Treasurer (our “CFO”);

 

  Ÿ  

Sunil Nagdev, our former Vice President, Worldwide Services;

 

  Ÿ  

Jason Forget, our Vice President, Business Operations; and

 

  Ÿ  

Ralph Pisani, our Vice President, Worldwide Sales.

We refer to these executive officers collectively in this Compensation Discussion and Analysis and the related compensation tables as the “named executive officers.”

Specifically, this Compensation Discussion and Analysis provides an overview of our executive compensation philosophy, the overall objectives of our executive compensation program, and each element of compensation that we provide. In addition, we explain how and why our board of directors (the “Board”) arrived at the specific compensation policies and decisions involving our executive officers during 2010.

Mr. Nagdev resigned his position and terminated his employment with the Company on January 6, 2011.

This Compensation Discussion and Analysis contains forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation plans and arrangements. The actual compensation plans and arrangements that we adopt may differ materially from currently anticipated plans and arrangements as summarized in this Compensation Discussion and Analysis.

Executive Compensation Philosophy and Objectives

We operate in a highly competitive business environment, which is characterized by frequent technological advances, rapidly changing market requirements and the emergence of new market entrants. To succeed in this environment, we must continuously develop and refine new and existing products and services, devise new business models and demonstrate an ability to quickly identify and capitalize on new business opportunities. To achieve these objectives, we need to attract a highly talented and seasoned team of technical, sales, marketing, operations and other business professionals.

We compete with many other companies in seeking to attract and retain a skilled management team. To meet this challenge, we have embraced a compensation philosophy of offering our executive officers compensation and benefits packages that are focused on long-term value creation and rewarding them for achieving our financial and strategic objectives.

In prior years, we have oriented our executive compensation program to:

 

  Ÿ  

provide total compensation opportunities that enable us to recruit and retain executive officers with the experience and skills to manage the growth of our Company and lead us to the next stage of development;

 

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  Ÿ  

establish a clear alignment between the interests of our executive officers and the interests of our stockholders;

 

  Ÿ  

reinforce a culture of ownership, excellence and responsiveness; and

 

  Ÿ  

offer total compensation that we believe to be competitive and fair based on our understanding of the markets in which we compete for talent.

As we have grown and begun to transition to public company status, we have refined our executive compensation philosophy and objectives and now observe the following additional principles in formulating our compensation policies and making compensation decisions:

 

  Ÿ  

use short-term and long-term incentives to create a direct and meaningful link between Company business results, individual performance and rewards;

 

  Ÿ  

provide for significant differentiation in compensation opportunities for performance that is below, at and above target levels;

 

  Ÿ  

ensure that all employees have the opportunity to share in the success we create;

 

  Ÿ  

provide equity awards that reflect potential contributions as measured by position and expertise;

 

  Ÿ  

ensure that compensation plans and arrangements are simple to communicate and understand; and

 

  Ÿ  

ensure that compensation plans and arrangements are flexible to allow for adjustments for changing economic circumstances and affordability considerations.

Compensation Program Design

To date, the compensation of our executive officers, including the named executive officers, has typically consisted of base salary, a cash bonus opportunity and equity compensation in the form of stock options and restricted stock awards. In addition, executive officers resident in Israel also receive the customary benefits payable to Israeli executives, including managers’ insurance (“bituach minahalim”), an advanced study fund (“keren hishtalmut”), vacation and sick leave, recreation pay (“dmei havraa”) and use of an automobile. Of these components, only base salary is fixed. The other components generally are variable based on the performance of both the Company and the individual executive officer, measured against specific objectives that are determined in advance. The benefits payable to our Israeli executive officers generally are set according to local custom.

The key component of our executive compensation program has been equity awards in the form of stock options to purchase shares of our common stock. As a privately-held company, we have emphasized the use of equity to incent our executive officers to focus on the growth of our overall enterprise value and, correspondingly, to create value for our stockholders. In prior years, we have used stock options as our primary equity award vehicle. Going forward, we may use stock options, restricted stock units and other types of equity-based awards, as we deem appropriate, to offer our employees, including our executive officers, long-term equity incentives that align their interests with the long-term interests of our stockholders.

We also offer cash compensation in the form of base salaries and cash bonuses that we believe appropriately recognize and reward our executive officers for their individual contributions to our business. Typically, the determination of bonus payouts has been made by the Board (in the case of our CEO) or the CEO (in the case of our other executive officers) on a discretionary basis based on an evaluation of our financial and operational results as well as each executive officer’s performance against his individual performance objectives.

 

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When determining our compensation policies and practices, the Board considers various matters relative to the development of a compensation program that the Board believes is reasonable and prudent, including whether the policies and practices are reasonably likely to have a material adverse effect on the Company. We believe that the mix and design of our executive compensation policies and practices do not encourage management to assume excessive risks and are not reasonably likely to have a material adverse effect on the Company for the following reasons: we offer an appropriate balance of short-term and long-term incentives and fixed and variable amounts, our variable compensation is based on a balanced mix of criteria, and the Board has the authority to adjust variable compensation as appropriate.

Compensation-Setting Process

Role of the Board and Compensation Committee

The initial compensation arrangements with our executive officers, including the named executive officers, have been determined in negotiations with each individual executive when he joined the Company. Typically, the Board or our CEO have been responsible for negotiating these arrangements.

Following the completion of these arrangements, the Board has been responsible for overseeing, determining and approving the compensation of our CEO and our CEO has been responsible for determining the compensation of our other executive officers. Once we are a publicly-traded company, the Compensation Committee of the Board (the “Committee”) will assume responsibility for overseeing our executive compensation program and will approve the compensation of our CEO and will recommend for approval to the independent members of the Board the compensation of our executive officers.

Typically, in the first quarter of each year, the Board would review the compensation of our CEO. At that time, the Board would also evaluate the performance of the Company and the CEO’s contribution thereto to determine whether to pay him a cash bonus for the previous year and, if so, the amount of any such bonus.

Going forward, the Committee intends to review our executive compensation program on an annual basis, including any incentive compensation plans, to determine whether they are appropriate, properly coordinated and achieve their intended purposes, and recommend to the Board any modifications or new plans or programs.

Role of Senior Management

In prior years, our CEO has been responsible for determining the compensation of our other executive officers, including the other named executive officers. Our CEO has typically sought the input of our Board when discussing the performance of and compensation for our other executive officers. In this regard, our CEO has reviewed the performance of the other executive officers, including the other named executive officers, quarterly and was able to consult with the Board on his conclusions and recommendations as to their compensation, including base salary adjustments, cash bonus payouts and stock option awards.

The Board and our CEO have also coordinated with our CFO and human resources department in evaluating the financial, accounting, tax and retention implications of our executive compensation plans and arrangements.

Role of Compensation Consultant

In July 2010, the Company engaged Compensia, Inc., a national compensation consulting firm, to review the compensation arrangements of our CEO and to evaluate the Company’s equity award grant practices. Subsequently, Compensia’s engagement was expanded to include a general review of non-executive employee compensation.

 

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The Committee is authorized to retain the services of one or more executive compensation advisors, as it sees fit, in connection with the establishment of our compensation programs and related policies. In March 2011, Compensia was engaged by the Committee to provide it with information, recommendations and other advice relating to executive compensation on an ongoing basis. Accordingly, Compensia now serves at the discretion of the Committee.

The Committee has directed Compensia to review the process and data that the Board and our CEO have previously used for purposes of making executive officer and director compensation comparisons and to develop one or more groups of peer companies to help us determine the appropriate level of overall compensation for our executive officers, as well as assess each separate element of compensation, with a goal of more formally ensuring that the compensation we offer to our executive officers is competitive and fair.

In the future, we expect that the Committee, as part of its annual review of our executive officers’ compensation, will instruct its executive compensation advisor to analyze our executive compensation program to ensure that it remains properly aligned with our ongoing business strategy and that the pay mix and levels are competitive with current market practices.

Executive Compensation Program Elements

The following describes each element of our executive compensation program the rationale for each, and how compensation amounts and awards are determined.

Base Salary

To obtain the skills and experience that we believed were necessary to lead our growth, most of our executive officers, including the named executive officers, have been either founders of the Company or hired from larger organizations. Generally, their initial base salaries were established through arm’s-length negotiation at the time the individual executive officer was hired, taking into account their qualifications, experience and prior salary level.

Following the determination of these initial amounts, the Board, in the case of our CEO, and our CEO, in the case of our other executive officers, have conducted an annual review of each executive officer’s base salary, and made adjustments as it or he determined to be reasonable and necessary to reflect the scope of the applicable executive officer’s individual contributions and responsibilities, position in the case of a promotion and market conditions.

In connection with taking on the management of operations of the Company in July 2010, Mr. Forget’s base salary was increased from $175,000 to $185,000. In addition, in connection with taking on management of global sales in July 2010, Mr. Pisani’s base salary was increased from $150,000 to $165,000. No other adjustments were made to the 2010 base salaries of our named executive officers.

The base salaries paid to the named executive officers during 2010 are set forth in the Summary Compensation Table below.

Annual Cash Bonuses

We use cash bonuses to motivate our executive officers to achieve our short-term financial and strategic objectives while making progress towards our longer-term growth and other goals. The initial cash bonus opportunities for our executive officers, including the named executive officers, were

 

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established through arm’s-length negotiation at the time each individual executive officer was hired, taking into account his qualifications, experience and prior compensation level. In subsequent years, the cash bonus opportunities of our executive officers have been determined at the beginning of each year by the Board or our CEO, as applicable, taking into account each executive officer’s current position, expected contributions for the current year, internal equity and market conditions. Such determination also took into consideration past performance, including the actual performance with respect to an executive officer’s achievement of any performance targets to the extent applicable, as described below.

In 2010, the cash bonus opportunities for the named executive officers were as follows:

Shlomo Kramer

Our CEO’s cash bonus opportunity was established by the Board in connection with the negotiation and execution of his employment transition letter dated September 29, 2010 (which is described in more detail below). His target cash bonus opportunity for 2010 was set at $250,000 and was payable in the sole discretion of the Board based on its evaluation of the Company’s overall financial and operational performance for the year.

Terrence J. Schmid

Our CFO’s cash bonus opportunity was established in connection with the negotiation and execution of his employment offer letter dated August 16, 2010 (which is described in more detail below). Accordingly, his target cash bonus opportunity for 2010 was set at $62,500; one-half of which was based on the Company’s non-GAAP net income for the fourth quarter and one-half of which was based on customer bookings recorded for the fourth quarter as reflected in the Company’s annual operating plan. To the extent that the Company achieved its target non-GAAP net income and customer bookings targets for the fourth quarter, he would receive his target bonus. If either the target non-GAAP net income or customer bookings targets were not met, the applicable portion of his target bonus opportunity would be pro-rated for the percentage achievement with respect to that performance measure. The non-GAAP net income target for the fourth quarter and the customer bookings target were set at levels that were determined to be challenging to achieve. For these purposes, “non-GAAP net income” was to be calculated as GAAP net income for the quarter after reduction for the stock-compensation expense recorded for such quarter, and “customer bookings” meant customer purchase orders that were accepted by the Company after the satisfaction of all related contingencies.

Ralph Pisani

Mr. Pisani’s cash bonus opportunity was established by our CEO at the beginning of 2010 as part of the Company’s sales commission plan and was set at $150,000. In connection with his promotion to Vice President, Worldwide Sales in July 2010, his cash bonus opportunity was increased to $160,000. For the first half of 2010, 80% of his cash bonus opportunity was based on customer bookings, 10% of his cash bonus opportunity was based on maintenance and 10% of his cash bonus opportunity was based on profitability, while for the second half of 2010, 90% of his cash bonus opportunity was based on customer bookings and 10% of his cash bonus opportunity was based on profitability. For the first half of 2010, for achievement of up to 100% of target, Mr. Pisani would receive commissions of 0.29% of customer bookings and 0.17% of maintenance, for achievement between 100% and 110% of target, Mr. Pisani would receive commissions of 0.43% of customer bookings and 0.25% of maintenance and for achievement greater than 110% of target, Mr. Pisani would receive commissions of 0.58% of customer bookings and 0.34% of maintenance. For the second half of 2010, for achievement of up to 100% of target, Mr. Pisani would receive commissions of 0.20% of customer bookings, for achievement between 100% and 110% of target, Mr. Pisani would receive commissions of 0.30% of

 

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customer bookings and for achievement greater than 110%, Mr. Pisani would receive commissions of 0.40% of customer bookings. In addition, the commission plan provided for specific “escalators” that would increase the bonus amount payable if the number of customer bookings for the year exceeded the target set forth in the Company’s annual operating plan. Based on his performance in 2010 measured against the commission plan, none of the escalators were applied to increase the bonus amount payable. Mr. Pisani’s commission targets for 2010 were set at levels that were determined to be challenging to achieve. For these purposes, “profitability” was to be calculated by subtracting the cost of goods sold and the operating expenses from the Company’s revenue and “maintenance” means all maintenance renewals recorded.

Sunil Nagdev

Mr. Nagdev’s cash bonus opportunity was established in connection with the negotiation and execution of his employment offer letter dated April 3, 2008 (which is described in more detail below). Accordingly, his target cash bonus opportunity for 2010 was set at $115,000. His cash bonus opportunity was based on his performance against a series of several individual financial and operational performance objectives (“MBOs”). The MBOs were established and evaluated on a quarterly basis, and the MBOs and relative weighting assigned to each MBO varied on a quarterly basis. These MBOs included achieving the customer bookings targets and meeting the services budget, as well as other objectives including the successful development of a series of consulting resources, the maintenance of an effective customer support organization, and the implementation of customer certification platforms for our products.

Jason Forget

Mr. Forget’s cash bonus opportunity was established at the beginning of 2010 and was set at $65,000. For the first half of 2010, Mr. Forget participated in the Company’s sales commission plan. 90% of his cash bonus opportunity was based on customer bookings he recorded for the year and 10% was based on achieving profitability, in each case with targets set at levels that were determined to be challenging to achieve. For achievement of up to 100% of target, Mr. Forget would receive commissions of 0.08% of customer bookings, for achievement between 100% and 110% of target, Mr. Forget would receive commissions of 0.12% of customer bookings and for achievement greater than 110% of target, Mr. Forget would receive commissions of 0.16% of target. In July 2010, in connection with Mr. Forget taking on the management of operations of the Company, Mr. Forget’s cash bonus opportunity was increased by $10,000. In addition, for the second half of 2010, 63% of his cash bonus opportunity was based on customer bookings he recorded for the year, 10% was based on achieving profitability and 27% was based on his individual MBOs. For the second half of 2010, for achievement of up to 100% of target, Mr. Forget would receive commissions of 0.07% of customer bookings, for achievement between 100% and 110% of target, Mr. Forget would receive commissions of 0.10% of customer bookings and for achievement greater than 110% of target, Mr. Forget would receive commissions of 0.13% of customer bookings. The MBOs were established and evaluated on a quarterly basis, and the MBOs and relative weighting assigned to each MBO varied on a quarterly basis. The MBOs included the development of our sales management framework and a commission plan for the sales organization, and the successful launch of several sales-oriented initiatives.

2010 Bonus Decisions

The cash bonus for our CEO was determined after the end of the year in the sole discretion of the Board, and in the case of the other executive officers, by our CEO on a quarterly basis, based on the assessment of the Company’s financial and operational performance as set forth in our annual operating plan and, in the case of certain executive officers, the evaluation of such executive officer’s performance against his MBOs for the year.

 

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While the decision to pay bonuses and any amounts payable are made in the sole discretion of the Board or our CEO, as applicable, the Board provided advice to our CEO on determining the amounts of any bonuses payable to our other executive officers (except for those cash bonuses earned under the sales commission plans described above), and the CEO made the final determinations on such bonuses, based on the actual performance of the other executive officers, as well as his evaluation of the expected and actual performance of each executive officer, his or her individual contributions and responsibilities and market conditions.

In March 2011, the Board evaluated the Company’s financial and operational performance for 2010 and the performance of our CEO for purposes of making bonus decisions. In the case of our CEO, the Board determined that the Company had achieved its principal financial objective for the year (which was measured on the basis of our 2010 non-GAAP net income) and its principal operational objective for the year (which was measured on the basis of customer bookings) and approved a bonus of $250,000.

In addition, our CEO assessed each executive officer’s contributions to the Company’s performance in order to determine the bonus payments for our other executive officers, including the other named executive officers. In the case of our CFO, our CEO determined that, during his time with the Company, he had made a significant contribution to the Company’s achievement of its principal financial and operational performance objectives for the fourth quarter and determined that he receive a bonus of $10,313, which was prorated from his target bonus of $62,500 to reflect the partial year he was employed by the Company. In the case of Mr. Nagdev, based on the performance of the Company and his actual performance with respect to his various MBOs, our CEO determined that he had achieved 100%, 95%, 93% and 91% with respect to each of his quarterly MBOs, respectively, earning quarterly cash bonuses in the aggregate amount of $108,963 for 2010. In the case of Mr. Forget, based on his actual performance under the commission plan for the first half of the year and based on his actual performance with respect to his various MBOs for the second half of 2010, our CEO determined that he had achieved 100% of his MBOs in the third quarter and 99% of his MBOs in the fourth quarter and that he receive, together with commissions earned under the commission plan, an aggregate cash bonus of $64,464. In the case of Mr. Pisani, based on his actual performance under the commission plan, he earned an aggregate cash bonus of $142,106.

The cash bonuses paid to the named executive officers for 2010 are set forth in the Summary Compensation Table below.

In November 2010, the Board approved the 2011 Executive Incentive Plan for our executive officers. This plan provides for both a quarterly component pursuant to which payouts may be made based on actual achievement against pre-established corporate and individual performance objectives and an annual component pursuant to which payouts may be made if the Company exceeds its internal targets for net income and bookings as reflected in the Company’s annual operating plan for 2011.

Following this offering, the Board intends to put in place a Senior Executive Incentive Bonus Plan that will provide a formal framework for the Company’s executive officer cash bonus plan.

Equity Compensation

We use equity awards to incent and reward our executives officers, including the named executive officers, for long-term corporate performance based on the value of our common stock and, thereby, to align the interests of our executive officers with those of our stockholders.

Historically, the size and form of the initial equity awards for our executive officers have been established through arm’s-length negotiation at the time the individual executive officer was hired. In

 

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making these awards, the Board has considered, among other things, the prospective role and responsibility of the executive officer, the amount of equity-based compensation held by the executive officer at his former employer, the cash compensation received by the executive officer and the need to create a meaningful opportunity for reward predicated on the creation of long-term stockholder value.

In addition, the Board has periodically granted equity awards to our executive officers, including the named executive officers, to ensure that their overall equity position was consistent with our compensation objectives, including our objectives of aligning the interest of our executive officers and the interests of our stockholders and our objective of offering total compensation that we believe to be competitive and fair. The Board has not applied a rigid formula in determining the size of these stock option awards. In making these awards, the Board has exercised its judgment and discretion and considered, among other things, the Company’s financial and operational results, the role and responsibility of the executive officer, individual performance, his individual experience, skills, contributions and responsibilities, competitive factors, the amount of equity-based equity compensation already held by the executive officer, the cash compensation received by the executive officer and market conditions.

Historically, the Board has had responsibility for granting equity awards to our executive officers. Going forward, the Committee will be responsible for making recommendations of equity awards to our executive officers, which will be approved by our Board.

In February 2010, the Board approved stock option grants to our employees, including certain of our executive officers, in recognition of our financial and operational results and each executive officer’s individual performance for the preceding 12 months. These options were granted following a determination of the fair market value of our common stock. In determining the amount of each executive officer’s stock option grant, the Board took into consideration the factors described above, as well as internal equity and current market practice. At that time, the Board granted Messrs. Nagdev, Forget and Pisani stock options to purchase 12,500, 25,000 and 7,500 shares of our common stock, respectively, with these options scheduled to vest over four years.

In June 2010, the Board approved stock option grants to our employees, including certain of our executive officers, to meet its retention objectives with respect to these individuals. At that time, in connection with his promotion to Vice President, Worldwide Sales, the Board granted Mr. Pisani a stock option to purchase 30,000 shares of our common stock, with the option scheduled to vest over four years.

In September 2010, consistent with our practice in prior years, we sold Mr. Kramer shares of our common stock at its then-current fair market value in two separate restricted stock purchase transactions to secure his continued services as our President and Chief Executive Officer and to meet our retention objectives.

 

  Ÿ  

In the first transaction, the Board agreed to sell and issue to Mr. Kramer 632,865 shares of our common stock at a purchase price of $3.30 per share, subject to a right of repurchase in favor of the Company that expires periodically over four years, and further subject to partial accelerated expiration of the right of repurchase in the event of a change in control of the Company and full accelerated expiration of the right of repurchase in the event of certain terminations of employment following a change in control of the Company.

 

  Ÿ  

In the second transaction, the Board agreed to sell and issue to Mr. Kramer 210,954 shares of our common stock at a purchase price of $3.30 per share, subject to a right of repurchase in favor of the Company that expires after five years, and further subject to accelerated expiration of the right of repurchase in the event of a change in control of the Company or an initial public offering of our common stock in which the Company is valued at more than $500 million.

 

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We chose to utilize a stock purchase structure instead of granting Mr. Kramer stock options because we believed that Mr. Kramer should have a direct and immediate ownership stake in the Company, coupled with an effective retention mechanism. The restricted stock purchase, along with the Company’s right of repurchase with respect to such shares that remain subject to vesting, achieved that objective while also enabling Mr. Kramer to commence the capital gains holding period for tax purposes on the date of the initial purchase of such shares. We included a right of repurchase in favor of the Company in Mr. Kramer’s stock purchase agreements as we view these arrangements as having a compensatory element. Similar to the vesting of stock options, the right of repurchase is a retention tool and allows the Company to repurchase unvested equity at the original purchase price should an employee leave the Company.

In November 2010, in connection with the hiring of Mr. Schmid as our CFO, the Board granted to Mr. Schmid a stock option to purchase 210,000 shares of our common stock, with the option scheduled to vest over four years.

The equity awards granted to the named executive officers during 2010 are set forth in the Summary Compensation Table and the Grants of Plan-Based Awards Table below.

Welfare and Other Benefits

We have established a tax-qualified Section 401(k) retirement plan for all employees who satisfy certain eligibility requirements, including requirements relating to age and length of service. Under this plan, employees may elect to defer a portion of their current compensation subject to certain statutory limits, and contribute to the plan. We currently do not match any contributions made by our employees, including executive officers. We intend for the plan to qualify under Section 401(a) of the Internal Revenue Code so that contributions by employees to the plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the plan.

In addition, we provide other benefits to our executive officers, including the named executive officers, on the same basis as all of our full-time employees. These benefits include medical, dental, and vision benefits, medical and dependent care flexible spending accounts, short-term and long-term disability insurance, accidental death and dismemberment insurance and basic life insurance coverage. These benefits are provided to our executive officers on the same general terms as to all of our full-time employees in the country in which they are resident.

We believe that our employee benefits programs are affordable and competitive in relation to the market based on our understanding of the markets in which we compete for talent. We adjust our employee benefits programs as needed based upon regular monitoring of applicable laws and practices and the competitive market.

We do not provide perquisites to our executive officers, except in limited situations where we believe it is appropriate to assist an individual in the performance of his duties, to make our executive officers more efficient and effective, or for recruitment and retention purposes. During 2010, we provided Mr. Kramer with a $25,000 relocation allowance. In addition, executive officers resident in Israel received the customary benefits payable to Israeli executives, including managers’ insurance (“bituach minahalim”), contributions to an advanced study fund (“keren hishtalmut”), vacation and sick leave, recreation pay (“dmei havraa”) and use of an automobile.

In the future, we may provide perquisites or other personal benefits in limited circumstances, such as where we believe it is appropriate to assist an individual executive officer in the performance of his or her duties, to make our executive officers more efficient and effective, or for recruitment, motivation, or retention purposes. All future practices with respect to perquisites or other personal benefits will be approved and subject to periodic review by the Committee.

 

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Employment Agreements

While we do not have employment agreements with any of our named executive officers, the initial terms and conditions of employment of each of the named executive officers are set forth in a written employment offer letter (or, in the case of Mr. Kramer, employment transition letter). For a summary of the material terms and conditions of employment for the named executive officers, see “—Employment, Severance and Change in Control Agreements” below.

In retaining our executive officers, we recognized that it would be necessary to recruit candidates from outside our Company with the requisite experience and skills to manage a dynamic, growing business. In addition, the Board recognized that a competitive compensation package would have to contain a financial inducement sufficient to motivate the candidate to accept an employment offer over any competing offers. Accordingly, the Board sought to develop compensation packages that were sufficient to attract qualified candidates who could fill our most critical positions. At the same time, the Board was sensitive to the need to integrate new executive officers into our executive compensation structure, balancing both competitive and internal equity considerations.

Mr. Kramer’s Transition Agreement

In August 2010, in connection with his transition of employment from Imperva, Ltd. to the Company, we entered into an employment transition letter with Mr. Kramer setting forth the terms and conditions of his employment. These arrangements were reviewed and approved by the Board.

In effecting the transition of employment for Mr. Kramer, the Board approved an initial base salary of $250,000 for Mr. Kramer, as well as an initial target cash bonus opportunity of $250,000. In addition, the Company agreed to pay certain relocation costs associated with Mr. Kramer’s relocation from Israel to the United States. Other than these terms, Mr. Kramer’s employment is “at will” and for no specific period of time.

Mr. Schmid’s Offer Letter

In November 2010, Mr. Schmid was named Chief Financial Officer and Treasurer. Mr. Schmid’s employment offer letter sets forth the principal terms and conditions of his employment, including an initial base salary of $250,000, an initial target cash bonus opportunity of $62,500 (payable quarterly), and an initial stock option award to purchase 210,000 shares of our common stock (subject to accelerated vesting as described below). Other than these terms, Mr. Schmid’s employment is “at will” and for no specific period of time.

Post-Employment Compensation

Except as described in the following paragraph, we do not have any agreements or other arrangements with any of our executive officers that provide for payments or benefits in the event of a termination of employment or in connection with a change in control of the Company.

The restricted stock awards granted to Mr. Kramer and the stock option granted to Mr. Schmid provide for accelerated vesting of any outstanding and unvested portion of such awards in the event of a change in control of the Company and/or their termination of employment under specified circumstances following a change in control of the Company. We believe that these protections were necessary, in the case of Mr. Schmid, to induce him to forego other opportunities or leave his current employment for the uncertainty of a demanding position in a new and unfamiliar organization and, in the case of Mr. Kramer, to meet our retention objectives. We also believe that entering into these arrangements will help these executive officers maintain continued focus and dedication to their responsibilities to help maximize stockholder value if there is a potential transaction that could involve a change in control of the Company.

 

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For a summary of the material terms and conditions of these post-employment compensation arrangements, see “—Potential Payments Upon Termination or Change in Control.”

Other Compensation Policies

Stock Ownership Guidelines

Currently, we have not implemented a policy regarding minimum stock ownership requirements for our executive officers, including the named executive officers.

Compensation Recovery Policy

Currently, we have not implemented a policy regarding retroactive adjustments to any cash or equity-based incentive compensation paid to our executive officers and other employees where the payments were predicated upon the achievement of financial results that were subsequently the subject of a financial restatement. We intend to adopt a general compensation recovery (“clawback”) policy covering our annual and long-term incentive award plans and arrangements once the SEC adopts final rules implementing the requirement of Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Derivatives Trading and Hedging Policy

Currently, we have not implemented a policy regarding the trading of derivatives or the hedging of our equity securities by our employees, including the named executive officers, and directors.

Tax and Accounting Considerations

Deductibility of Executive Compensation

Section 162(m) of the Internal Revenue Code (the “Code”) generally disallows public companies a tax deduction for federal income tax purposes of remuneration in excess of $1 million paid to the chief executive officer and each of the three other most highly compensated executive officers (other than the chief financial officer) in any taxable year. Generally, remuneration in excess of $1 million may only be deducted if it is “performance-based compensation” within the meaning of the Code. In this regard, the compensation income realized upon the exercise of stock options granted under a stockholder-approved stock option plan generally will be deductible so long as the options are granted by a committee whose members are non-employee directors and certain other conditions are satisfied. On the other hand, annual cash bonuses will not be deductible unless paid on the basis of pre-established objective performance criteria, the satisfaction of which is certified after the end of the fiscal year and upon meeting certain other conditions.

As we are not currently publicly-traded, the Board has not previously taken the deductibility limit imposed by Section 162(m) into consideration in setting compensation for our executive officers. We expect that, where reasonably practicable, we will seek to qualify the variable compensation paid to our executive officers for the “performance-based compensation” exemption from the deductibility limit. As such, in approving the amount and form of compensation for our executive officers in the future, we will consider all elements of the cost to us of providing such compensation, including the potential impact of Section 162(m). In the future, the Committee may, in its judgment, authorize compensation payments that do not comply with an exemption from the deductibility limit when it believes that such payments are appropriate to attract and retain executive talent.

 

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Taxation of “Parachute” Payments

Sections 280G and 4999 of the Code provide that executive officers and directors who hold significant equity interests and certain other service providers may be subject to significant additional taxes if they receive payments or benefits in connection with a change in control of the Company that exceed certain prescribed limits, and that the Company (or a successor) may forfeit a deduction on the amounts subject to this additional tax. We did not provide any executive officer, including any named executive officer, with a “gross-up” or other reimbursement payment for any tax liability that the executive might owe as a result of the application of Sections 280G or 4999 during 2010 and we have not agreed and are not otherwise obligated to provide any executive officer with such a “gross-up” or other reimbursement.

Accounting for Stock-Based Compensation

We follow Financial Accounting Standard Board Accounting Standards Codification Topic 718 (“ASC Topic 718”) for our stock-based compensation awards. ASC Topic 718 ASC requires companies to measure the compensation expense for all share-based payment awards made to employees and directors, including stock options and restricted stock awards, based on the grant date “fair value” of these awards. This calculation is performed for accounting purposes and reported in the compensation tables below, even though our executive officers may never realize any value from their awards. ASC Topic 718 also requires companies to recognize the compensation cost of their stock-based compensation awards in their income statements over the period that an executive officer is required to render service in exchange for the option or other award. After the completion of this offering, the Committee may consider the impact of ASC Topic 718 in connection with making equity-based awards.

Summary Compensation Table—2010

The following table summarizes the compensation that we paid to our chief executive officer, chief financial officer and each of our three other most highly compensated executive officers during the year ended December 31, 2010. We refer to these officers in this prospectus as our named executive officers.

 

Name and Principal Position

  Year     Salary
($)
    Stock
Awards

($)(1)
    Option
Awards
($)(1)
    Non-Equity
Incentive
Compensation
($)(2)
    All Other
Compensation
($)
    Total
($)
 

Shlomo Kramer(3)

    2010      $ 250,000      $ 1,643,845        —        $ 250,000      $ 62,351 (4)    $ 2,206,196   

President, Chief Executive Officer, and Director

             

Terrence J. Schmid(5)

    2010      $ 41,667        —            $ 377,076      $ 10,313        —        $ 429,056   

Chief Financial Officer and Treasurer

             

Ralph Pisani

    2010      $ 157,500        —            $ 44,943      $ 142,106        —        $ 344,549   

Vice President, Worldwide Sales

             

Sunil Nagdev(6)

    2010      $ 200,000        —            $ 11,078      $ 108,963        —        $ 320,041   

Former Vice President, Worldwide Services

             

Jason Forget

    2010      $ 180,000        —            $ 22,155      $ 64,464        —        $ 266,619   

Vice President, Business Operations

             

 

(1) This column reflects the aggregate grant date fair value of equity awards granted in 2010 and calculated in accordance with FASB ASC 718, excluding the effect of estimated forfeitures. See Note 13 of “Notes to Consolidated Financial Statements” for a discussion of the assumptions made by the Company in determining the valuation of equity awards.

 

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(2) Represents cash incentive payments paid for performance in 2010.
(3) $156,250 of Mr. Kramer’s base salary was paid in Israeli shekels and converted to U.S. dollars for the purposes of this column, using the average exchange rate for 2010 of US$1.00 to NIS 3.733. Mr Kramer purchased his stock awards at a price of $3.30 per share, the fair market value of the Company’s stock as determined by the Board on the grant date.
(4) The amounts shown are comprised of relocation benefits from Israel to the U.S. in the amount of $25,000 and benefits associated with employment in Israel: employer contributions to a pension fund and statutory severance payments (“bituach minahalim”) in the amount of $20,829, tax reimbursement of such benefits in the amount of $2,797 and employer contributions to the education fund (“keren hishtalmut”) in the amount of $11,719. The amounts shown also include car-related expenses and payments associated with meals, telephone expenses and a holiday present. Other than the relocation benefits, the amount attributable to each such perquisite or benefit for Mr. Kramer does not exceed the greater of $25,000 or 10% of the total amount of perquisites received by him. With the exception of the $25,000 in relocation benefits, which were paid in U.S. dollars, such amounts were paid in Israeli shekels and converted to U.S. dollars for the purpose of this column, using the average exchange rate for 2010 of US$1.00 to NIS 3.733.
(5) Mr. Schmid’s employment with the Company commenced on November 1, 2010 at an annual base salary of $250,000. Prior to his employment, no single individual served in the capacity of or performed the functions of chief financial officer of the Company.
(6) Mr. Nagdev resigned in January 2011.

Grants of Plan-Based Awards—2010

The following table sets forth certain information with respect to equity grants awarded to our named executive officers for the year ended December 31, 2010.

 

Name

  Grant Date     Estimated Future
Payouts Under Non-

Equity Incentive
Plan Awards
    All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
    All Other
Option
Awards:
Number of
Securities
Underlying
Options(1)
    Exercise
or Base
Price of
Option
Awards
($)
    Grant Date
Fair Value of
Stock and
Option
Awards
($)(2)
 
    Target
($)
    Maximum
($)
         

Shlomo Kramer(3)

    09/30/2010            210,954        —        $ 3.30      $ 465,070   
    09/30/2010            632,865        —        $ 3.30      $ 1,178,774   
      250,000        250,000           

Terrence J. Schmid(3)

    11/17/2010            —          210,000      $ 3.70      $ 377,076   
      62,500        62,500           

Ralph Pisani(4)

    02/05/2010            —          7,500      $ 1.68      $ 6,561   
    06/04/2010            —          30,000      $ 2.52      $ 38,382   
      160,000        —             

Sunil Nagdev(3)

    02/05/2010            —          12,500      $ 1.68      $ 11,078   
      115,000        115,000           

Jason Forget(5)

    02/05/2010            —          25,000      $ 1.68      $ 22,155   
      75,000        —             

 

(1) Unless otherwise noted in the footnotes, these options vest over four years as follows: 25% of the shares vest one year following the vesting commencement date, with the remaining 75% vesting in equal quarterly installments over the next three years.
(2) The grant date fair value of each equity award is computed in accordance with FASB ASC 718. Mr Kramer purchased his stock awards at a price of $3.30 per share, the fair market value of the Company’s stock as determined by the Board on the grant date, at the aggregate purchase price of $696,150 and $2,088,455, respectively.

 

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(3) The non-equity incentive plan with respect to Messrs. Kramer, Schmid and Nagdev does not have a threshold.
(4) Mr. Pisani participates in a sales commission plan as described in more detail above in “—Executive Compensation Program Elements.” There is no maximum under his sales commission plan.
(5) Mr. Forget participates in a sales commission plan as described in more detail above in “—Executive Compensation Program Elements.” There is no maximum under his sales commission plan.

Outstanding Equity Awards at Fiscal Year End

The following table sets forth certain information with respect to outstanding equity awards as of December 31, 2010 with respect to our named executive officers.

 

    Option awards     Stock awards  

Name

  Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
    Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)(1)
    Option
Exercise
Price ($)
    Option
Expiration
Date
    Number
of
Shares
or Units
of Stock
That
Have Not
Vested
    Market Value
of Shares or
Units of Stock
That

Have Not
Vested

(2)
 

Shlomo Kramer

    —          —          —          —          210,954 (3)    $ 780,530   
    —          —          —          —          632,865 (4)    $ 2,341,601   
    —          —          —          —          234,578 (5)    $ 867,939   

Terrence J. Schmid

    —          108,108 (6)    $ 3.70        11/17/2020        —          —     
    —          101,892 (6)    $ 3.70        11/17/2020        —          —     

Ralph Pisani

    20,625        9,375 (7)    $ 1.64        05/29/2018        —          —     
    6,562        8,437 (8)    $ 1.64        02/10/2019        —          —     
    2,187        2,812 (9)    $ 1.64        08/06/2019        —          —     
    —          7,500 (10)    $ 1.68        02/05/2020        —          —     
    —          30,000 (11)    $ 2.52        06/04/2020        —          —     

Sunil Nagdev(12)

    70,312        42,187 (13)    $ 1.64        05/29/2018        —          —     
    —          12,500 (10)    $ 1.68        02/05/2020        —          —     

Jason Forget

    5,625 (14)      —        $ 0.78        06/26/2016        —          —     
    6,187        2,812 (15)    $ 1.06        02/06/2018        —          —     
    7,656        9,843 (8)    $ 1.64        02/10/2019        —          —     
    —          25,000 (10)    $ 1.68        02/05/2020        —          —     

 

(1) These options vest over four years as follows: 25% of the shares vest 1 year following the vesting commencement date (as noted below), with the remaining 75% vesting in equal quarterly installments over the next three years.
(2) There was no public market for our common stock in 2010. The fair value of our common stock as of December 31, 2010 was $3.70 per share.
(3) The Company’s right of repurchase with respect to these shares lapses after 60 months of continuous service after the vesting commencement date of September 30, 2010.
(4) The Company’s right of repurchase with respect to 25% of these shares lapses after 12 months of continuous service after the vesting commencement date of May 1, 2010, with the remaining 75% lapsing in equal quarterly installments over the next three years.
(5) The Company’s right of repurchase with respect to these shares lapses after 60 months of continuous service after the vesting commencement date of July 31, 2007.
(6) The vesting commencement date of this option is November 1, 2010.
(7)

The vesting commencement date of this option is February 11, 2008.

 

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(8) The vesting commencement date of this option is January 1, 2009.
(9) The vesting commencement date of this option is February 11, 2009.
(10) The vesting commencement date of this option is January 1, 2010.
(11) The vesting commencement date of this option is June 1, 2010.
(12) On February 9, 2011, Mr. Nagdev exercised vested options to purchase 73,437 shares of common stock and the balance of his options were cancelled in connection with his termination.
(13) The vesting commencement date of this option is April 8, 2008.
(14) This option is fully vested.
(15) The vesting commencement date of this option is February 6, 2008.

Option Exercises and Stock Vested—2010

There were no exercises of stock options or vesting of stock awards as of December 31, 2010 with respect to our named executive officers.

Stock and Benefit Plans

2003 Stock Plan

Our 2003 Stock Plan (the “2003 Stock Plan”), which amended and restated the 2002 Stock Plan adopted by our board of directors in June 2002, was adopted by our Board on February 24, 2003 and approved by our stockholders on May 22, 2003, and has most recently been amended on August 25, 2010. We have reserved 5,837,298 shares of our common stock for issuance under our 2003 Stock Plan. This number is subject to adjustment in the event of a stock split, stock dividend or other changes in our capitalization.

Our 2003 Stock Plan is administered by our Board. Our Board has the authority to delegate full power and authority to one or more committees of the board to select the individuals to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award, to provide substitute awards and to determine the specific terms and conditions of each award, subject to the provisions of the 2003 Stock Plan.

The 2003 Stock Plan permits us to make grants of incentive stock options and non-qualified stock options and the direct award or sale of shares of our common stock (including restricted common stock) to officers, employees, directors, consultants and other key persons. Stock options granted under the 2003 Stock Plan have a maximum term of ten years from the date of grant and incentive stock options have an exercise price of no less than the fair market value of our common stock on the date of grant. Upon a sale event in which all awards are not assumed or substituted by the successor entity, the 2003 Stock Plan and all stock options issued thereunder will be subject to either (1) accelerated vesting and full exercisability, followed by the cancellation of such options, or (2) settlement of their full value (whether or not then exercisable) in cash or cash equivalents, followed by the cancellation of such options.

All stock option awards that are granted to the named executive officers are covered by a stock option agreement. Generally, under the stock option agreements, 25% of the shares vest on the first anniversary of the grant date and the remaining shares vest quarterly over the following three years. Our Board may accelerate the vesting schedule in its discretion. We have not engaged in any option repricing or other modification to any of its outstanding equity awards during the fiscal year ended December 31, 2010.

Our Board has also adopted Appendix A to the 2003 Stock Plan (the “Israel Appendix”) to apply to grants made to our employees in Israel, the UK Sub-Plan of the 2003 Stock Plan (the “UK Sub-Plan”) to apply to grants made to our employees in the United Kingdom and the Addendum to the 2003 Stock Plan (the “French Addendum”) to apply to option grants made to our employees in France.

 

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The Israel Appendix allows us to grant options to Israeli employees under the 2003 Stock Plan under similar terms to those in the 2003 Stock Plan, and such options may qualify for tax-favorable treatment pursuant to Section 102(b) of the 1961 Israeli Income Tax Ordinance [New Version] 1961. The UK Sub-Plan allows us to grant options to our UK employees under similar terms to those in the 2003 Stock Plan. The French Addendum allows us to grant options to French employees under the 2003 Stock Plan under similar terms to those in the 2003 Stock Plan, and such options may qualify for tax-favorable treatment under applicable French law.

Our Board has determined not to grant any further awards under the 2003 Stock Plan after the completion of the offering. We intend to adopt the 2011 Stock Option and Grant Plan to be effective upon the consummation of an initial public offering, under which we expect to make all future awards.

2011 Stock Option and Incentive Plan

On September 9, 2011, the Board, upon the recommendation of the Committee, adopted the 2011 Stock Option and Incentive Plan (the “2011 Plan”), which was subsequently approved by the Company’s stockholders. The 2011 Plan will replace the 2003 Stock Plan, as the Board has determined not to make additional awards under that plan. The 2011 Plan provides flexibility to the Committee to use various equity-based incentive awards as compensation tools to motivate the Company’s workforce.

We have initially reserved 1,000,000 shares of our common stock for the issuance of awards under the 2011 Plan. In addition, any reserved but unissued shares under the 2003 Stock Plan will be added to the number of shares reserved for issuance under the 2011 Plan. The 2011 Plan also provides that the number of shares reserved and available for issuance under the plan will automatically increase each January 1, beginning in 2012 and ending in 2015, by the lesser of 4% of the outstanding number of shares of common stock on the immediately preceding December 31 or such number of shares as determined by the Board. This number is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization.

The shares we issue under the 2011 Plan will be authorized but unissued shares or shares that we reacquire. The shares of common stock underlying any awards that are forfeited, canceled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without any issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2011 Plan or 2003 Stock Plan are added back to the shares of common stock available for issuance under the 2011 Plan.

The 2011 Plan will be administered by our Board or the Committee (the “Administrator”). The Administrator has full power to select, from among the individuals eligible for awards, the individuals to whom awards will be granted, to make any combination of awards to participants, and to determine the specific terms and conditions of each award, subject to the provisions of the 2011 Plan. Persons eligible to participate in the 2011 Plan will be those full or part-time officers, employees, non-employee directors and other key persons (including consultants and prospective officers) of the Company and its subsidiaries as selected from time to time by the Administrator in its discretion.

The 2011 Plan permits the granting of (1) options to purchase common stock intended to qualify as incentive stock options under Section 422 of the Code and (2) non-qualified stock options. The exercise price of each option will be determined by the Administrator but may not be less than 100% of the fair market value of the common stock on the date of grant. The term of each option will be fixed by the Administrator and may not exceed ten years from the date of grant. The Administrator will determine at what time or times each option may be exercised.

The Administrator may award stock appreciation rights subject to such conditions and restrictions as the Administrator may determine. Stock appreciation rights entitle the recipient to shares of common

 

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stock equal to the value of the appreciation in the stock price over the exercise price. The exercise price is the fair market value of the common stock on the date of grant.

The Administrator may award restricted shares of common stock to participants subject to such conditions and restrictions as the Administrator may determine. These conditions and restrictions may include the achievement of certain performance goals and/or continued employment with us through a specified restricted period. The Administrator may award restricted stock units to any participants. Restricted stock units are ultimately payable in the form of shares of common stock and may be subject to such conditions and restrictions as the Administrator may determine. These conditions and restrictions may include the achievement of certain performance goals and/or continued employment with the Company through a specified vesting period.

The Administrator may grant performance share awards to any participant which entitle the recipient to receive shares of common stock upon the achievement of certain performance goals and such other conditions as the Administrator shall determine.

The Administrator may grant equity-based bonuses under the 2011 Plan to participants. These bonuses may be payable in shares or cash and may be subject to the achievement of certain performance goals.

The 2011 Plan provides that, if we have a change in control transaction, outstanding awards, including any vesting provisions, may be assumed or substituted by the successor company. Outstanding awards that are not assumed or substituted will expire upon the closing of a change in control transaction. In the discretion of the Administrator, the vesting of these awards may be accelerated in connection with these types of transactions.

The 2011 Plan includes limitations intended to comply with Section 162(m) of the Code. For example, no participant in the 2011 Plan may be granted more than 500,000 shares in any calendar year, except that newly hired employees may be granted up to 1,000,000 shares in their year of hire.

No other awards may be granted under the 2011 Plan after the date that is ten years from the date of stockholder approval. No awards under the 2011 Plan have been made prior to the date hereof.

2011 Employee Stock Purchase Plan

On September 9, 2011, the Board, upon the recommendation of the Committee, adopted the 2011 Employee Stock Purchase Plan (the “ESPP”), which was subsequently approved by the Company’s stockholders. The ESPP is designed to enable eligible employees to purchase shares of our common stock periodically at a discount. Purchases will be accomplished through participation in discrete offering periods. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Code. The ESPP will be effective at the same time as the registration statement for this offering.

We have initially reserved 500,000 shares of our common stock for issuance under the ESPP. The number of shares reserved for issuance under the ESPP will increase automatically on January 1 of each of the first eight years commencing with 2012 by the number of shares equal to 1% of our total outstanding shares as of the immediately preceding December 31 (rounded to the nearest whole share). Our board of directors or compensation committee may reduce the amount of the increase in any particular year. No more than 20,000,000 shares of our common stock may be issued under the ESPP, and no other shares may be added to the ESPP without the approval of our stockholders.

The Board or the Committee will administer the ESPP. Our employees generally will be eligible to participate in the ESPP if they are employed by us, or a subsidiary or parent of ours that we designate,

 

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and are regularly scheduled to work more than 20 hours per week and more than five months in a calendar year. Employees who are 5% stockholders, or would become 5% stockholders as a result of their participation in the ESPP, will be ineligible to participate in the ESPP. We may impose additional restrictions on eligibility as well. Under the ESPP, eligible employees may acquire shares of our common stock by accumulating funds through payroll deductions. Our eligible employees may select a rate of payroll deduction between 1% and 15% of their cash compensation. We also have the right to amend or terminate the ESPP, except that, subject to certain exceptions, no such action may adversely affect any outstanding rights to purchase stock under the ESPP. The ESPP will terminate on the tenth anniversary of the effective date (as set forth in the plan), unless it is terminated earlier by the Board.

When an offering period commences, our employees who meet the eligibility requirements for participation in that offering period will have to enroll in a timely manner to purchase shares in that offering period. Once an employee is enrolled, his or her participation will be automatic in subsequent offering periods. Each offering period may run for no more than 24 months and consist of no more than 5 purchase periods. An employee’s participation will automatically end upon termination of employment for any reason.

No participant will have the right to purchase our shares at a rate which, when aggregated with purchase rights under all our employee stock purchase plans that are also outstanding in the same calendar year(s), have a fair market value of more than $25,000, determined in accordance with Section 423 of the Code, for each calendar year in which that right is outstanding. In addition, no participant may purchase more than 10,000 shares in any offering period. The purchase price for shares of our common stock purchased under the ESPP will be 85% of the lesser of the fair market value of our common stock on the first day of the offering period or the last trading day of the applicable purchase period within that offering period.

In the event of a change in control transaction, each outstanding right to purchase shares under the ESPP may be assumed or substituted by our successor. In the event that the successor refuses to assume or substitute the outstanding purchase rights, any offering periods that commenced prior to the closing of the proposed change in control transaction will be shortened and terminated on a new purchase date. The new purchase date will occur on or prior to the closing of the proposed change in control.

401(k) Savings Plan

We have established a 401(k) plan to allow our employees to save on a tax-favorable basis for their retirement. We do not match any contributions made by any employees, including our named executive officers, pursuant to the plan.

Contributions to Israeli Employees

In 2010, we made contributions on behalf of Mr. Kramer to a retirement fund, a severance fund, and a continuing education fund, in each case, on the same basis as other Israeli employees. Since Mr. Kramer relocated to the United States in 2010, we will no longer continue to make these contributions.

Pension Benefits

None of our named executive officers participate in or have account balances in pension benefit plans sponsored by us.

 

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Non-Qualified Defined Contribution and Other Non-Qualified Defined Compensation Plans

None of our named executive officers participate in or have account balances in non-qualified defined contribution plans or other deferred compensation plans maintained by us.

Proprietary Information and Inventions Agreements

Each of our named executive officers has also entered into a standard form agreement with respect to proprietary information and inventions. Among other things, this agreement obligates each named executive officer to refrain from disclosing any of our proprietary information received during the course of employment and, with some exceptions, to assign to us any inventions conceived or developed during the course of employment.

Employment, Severance and Change in Control Agreements

We consider it essential to the best interests of our stockholders to foster the continuous employment of our key management personnel. In this regard, we recognize that the possibility of a change in control may exist and that the uncertainty and questions that it may raise among management could result in the departure or distraction of management personnel to the detriment of the Company and our stockholders. In order to reinforce and encourage the continued attention and dedication of certain key members of management, we have entered into several change in control agreements and severance agreements with certain of our executive officers.

“Change in control” generally comports with the definition set forth in the 2003 Stock Plan (via incorporation by reference to such definition or otherwise), which is as follows: (i) the consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (A) the continuing or surviving entity and (B) any direct or indirect parent corporation of such continuing or surviving entity; or (ii) the sale, transfer or other disposition of all or substantially all of the Company’s assets. A transaction shall not constitute a change in control if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.

“Cause” generally means the employee’s (a) unauthorized use or disclosure of the Company’s confidential information or trade secrets, which use or disclosure causes material harm to the Company, (b) material breach of any agreement between the employee and the Company, (c) material failure to comply with the Company’s written policies or rules (d) conviction of, or the employee’s plea of “guilty” or “no contest” to, a felony under the laws of the United States or any state thereof, (e) gross negligence or willful misconduct, (f) continuing failure to perform assigned duties after receiving written notification of failure from the board of directors or (g) failure to cooperate in good faith with a governmental or internal investigation of the Company or its directors, officers or employees, if the Company has requested the employee’s cooperation. In the case of (b) and (f), “cause” will only exist if the employee has not cured the events described in (b) and (f) giving rise to “cause” within 20 days of written notice being provided.

“Involuntary termination” generally means either (a) involuntary discharge by the Company for reasons other than “cause” or (b) voluntary resignation following (i) a change in the employee’s position with the Company that materially reduces his/her level of authority or responsibility, (ii) a reduction in the employee’s base salary by more than 10% or (iii) receipt of notice that the employee’s principal workplace will be relocated more than 30 miles.

 

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Shlomo Kramer

On August 16, 2010, we entered into an offer letter agreement with Shlomo Kramer, our President and Chief Executive Officer. Under this agreement, Mr. Kramer is entitled to three months notice prior to the Company’s termination of his employment. Mr. Kramer is entitled to regular salary payments during this notice period.

On September 30, 2010, we entered into a stock purchase agreement with Mr. Kramer, pursuant to which Mr. Kramer acquired 632,865 shares of the Company’s common stock. Under this agreement, if the Company is subject to a change in control before the termination of Mr. Kramer’s service, the Company’s right of repurchase on 50% of the shares of common stock still subject to repurchase under this agreement shall immediately lapse. Additionally, if Mr. Kramer is subject to an involuntary termination within 12 months of such change in control, the Company’s right of repurchase on 100% of the shares of such common stock still subject to repurchase under this agreement shall immediately lapse. In this agreement, the definition of “change in control” is as follows (via incorporation by reference to the term “liquidation event” in our amended and restated certificate of incorporation in effect prior to the closing of this offering): (A) the closing of the sale, transfer or other disposition of all or substantially all of the Company’s assets, (B) the consummation of the merger or consolidation of the Company with or into another entity (except a merger or consolidation in which the holders of capital stock of the Company immediately prior to such merger or consolidation continue to hold at least 50% of the voting power of the capital stock of the Company or the surviving or acquiring entity), (C) the closing of the transfer (whether by merger, consolidation or otherwise), in one transaction or a series of related transactions, to a person or group of affiliated persons (other than an underwriter of the Company’s securities), of the Company’s securities if, after such closing, such person or group of affiliated persons would hold 50% or more of the outstanding voting stock of the Company, (D) a liquidation, dissolution or winding up of the Company; provided, however, that a transaction shall not constitute a change in control if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately prior to such transaction. The treatment of any particular transaction or series of related transactions as a change in control may be waived by the vote or written consent of the holders of 80% of the outstanding preferred stock (voting together as a single class and not as a separate series, and on an as-if converted basis).

On September 30, 2010, we entered into a stock purchase agreement with Mr. Kramer, pursuant to which Mr. Kramer acquired 210,954 shares of the Company’s common stock. Under this agreement, if the Company is subject to a change in control before the termination of Mr. Kramer’s service, the Company’s right of repurchase on 100% of the shares of such common stock still subject to repurchase under this agreement shall immediately lapse.

On July 7, 2007, we entered into a stock purchase agreement with Mr. Kramer, pursuant to which Mr. Kramer acquired 234,578 shares of the Company’s common stock. Under this agreement, if the Company is subject to a change in control or the Company undergoes its initial public offering, in either case before the termination of Mr. Kramer’s service, and the Company is valued at $500 million or more in such transaction, the Company’s right of repurchase on 100% of the shares of such common stock still subject to repurchase under this agreement shall immediately lapse.

Terrence J. Schmid

On September 29, 2010, we entered into an offer letter agreement with Mr. Schmid, our Chief Financial Officer. Under the offer letter agreement, if the Company is subject to a change in control before Mr. Schmid’s service with the Company terminates, 50% of the then unvested shares subject to his initial option grant shall immediately vest and become exercisable. Additionally, if Mr. Schmid is

 

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subject to an involuntary termination within three months before or 12 months following a change in control, 100% of the then unvested shares subject to his initial option grant shall immediately vest and become exercisable.

Sunil Nagdev

On April 3, 2008, we entered into an offer letter agreement with Mr. Nagdev, our former Vice President, Worldwide Services. Under the offer letter agreement, if the Company is subject to a change in control before Mr. Nagdev’s service with the Company terminates and Mr. Nagdev is subject to an involuntary termination within 12 months following such a change in control, 100% of his then unvested options to purchase the Company’s common stock shall immediately vest and become exercisable. Additionally, Mr. Nagdev would be entitled to base salary continuation for a period of three months as well as payments of his monthly COBRA premiums until the earliest of (i) six months following the date of termination, (ii) the expiration of continuation coverage under COBRA or (iii) the date when Mr. Nagdev becomes eligible for substantially similar equivalent health insurance coverage in connection with new employment or self-employment subject, in all cases, to Mr. Nagdev’s executing a release.

Mr. Nagdev resigned in January 2011 and received no payments or benefits in connection with his departure from the Company.

Potential Payments Upon Termination or Change in Control

The tables below reflect potential payments and benefits available for each of our named executive officers upon termination in connection with a change in control or termination, assuming the date of occurrence is December 31, 2010. See section entitled “Compensation—Employment, Severance and Change in Control Agreements.”

Named Executive Officer Benefits and Payments Upon Termination(1)

 

Name

   Termination     Involuntary Termination
within

One Year of Change in
Control
 

Shlomo Kramer

   $ 62,500 (2)    $ 62,500 (2) 

Terrence J. Schmid

     —          —     

Ralph Pisani

     —          —     

Sunil Nagdev

     —        $ 53,209 (3) 

Jason Forget

     —          —     

 

(1) Assumes triggering event effective as of December 31, 2010. Upon a voluntary termination or termination for cause, each named executive officer would receive any earned but unpaid base salary and unpaid vacation accrued until December 31, 2010. These payments would be available to all employees upon termination.
(2) Includes continuation of base salary for three months for Mr. Kramer.
(3) Includes continuation of base salary for three months for Mr. Nagdev and six months of continuation health insurance coverage for medical, dental and vision benefits under COBRA for Mr. Nagdev.

 

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Acceleration of Vesting of Options and Restricted Stock upon Termination(1)

 

Name

   Number of Shares of
Accelerated Stock and Value
upon a Change in Control
    Number of Shares of
Accelerated Stock and Value
upon Involuntary Termination
and in Connection with a
Change in Control
 

Shlomo Kramer

     8,610,205 (2)      12,185,875 (3) 

Terrence J. Schmid

     798,000 (4)      1,596,000 (5) 

Ralph Pisani

     —          —     

Sunil Nagdev

     —          497,714 (6) 

Jason Forget

     —          —     

 

(1) Assumes triggering event effective as of December 31, 2010 and excludes vested stock held as of such date. There was no public market for our common stock in 2010. We have estimated the market value of the accelerated option shares and shares of restricted stock based on the difference between our assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and the exercise price of such accelerated options or the fair value of our common stock as of December 31, 2010 of $3.70, as applicable.
(2) The Company’s right of repurchase with respect to 761,964 shares would lapse upon a change in control.
(3) The Company’s right of repurchase with respect to an additional 316,432 shares would lapse upon involuntary termination within 12 months of a change in control.
(4) 105,000 of Mr. Schmid’s options would accelerate upon a change in control.
(5) 210,000 of Mr. Schmid’s options would accelerate upon involuntary termination three months before or within 12 months of a change in control.
(6) 51,562 of Mr. Nagdev’s options would accelerate upon involuntary termination within 12 months of a change in control.

Director Compensation

We do not currently have a compensation program with respect to the service of our board of directors. On September 9, 2011, our board of directors approved a formal compensation program for our non-employee directors effective upon completion of this offering. Pursuant to this program, each non-employee director will receive a $30,000 annual retainer as consideration for services on our board of directors. The non-employee chairman of the board of directors will receive an additional $20,000 annual retainer. The chair of the audit committee will receive an additional $14,000 annual retainer and the other members of the audit committee will each receive an additional $7,000 annual retainer. The chair of the compensation committee will receive an additional $8,000 annual retainer and the other members of the compensation committee will each receive an additional $4,000 annual retainer. The chair of the nominating and corporate governance committee will receive an additional $5,000 annual retainer and the other members of the nominating and corporate governance committee will each receive an additional $2,500 annual retainer.

In addition, under the director compensation program, each non-employee director will be eligible to receive an annual stock option grant (on or around the date of our annual stockholders’ meeting) with a Black-Scholes value of $100,000 based on the date of grant, which option shall vest after one year. In addition, each new non-employee director will receive a stock option grant when such director initially joins our board of directors with a Black-Scholes value of $200,000 based on the date of grant, which option shall vest over three years in equal annual installments.

On May 18, 2010, we entered into a board of directors offer letter agreement with Mr. Pimentel, a member of the board of directors and chairman of the audit committee of the board of directors. On

 

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June 4, 2010, pursuant to his offer letter agreement and as compensation for his service as a member of our board of directors, we granted to Mr. Pimentel a stock option to purchase up to 60,000 shares of common stock at an exercise price per share of $2.52. Our board of directors approved the early exercise of Mr. Pimentel’s stock option such that the option is exercisable in full as of June 4, 2010, and our right of repurchase with respect to such shares shall lapse as follows: 25% of such shares shall lapse on June 4, 2011, and our right of repurchase shall lapse with respect to the remainder in 36 equal monthly installments thereafter. Such right of repurchase shall fully lapse upon a change in control pursuant to and in accordance with the terms of the 2003 Stock Plan. We have, from time to time, allowed early exercise of stock option grants so that the capital gains holding period for tax purposes may commence with respect to such exercised options. In the instances where we have allowed such early exercise, we have required the inclusion of a right of repurchase in favor of the Company.

On July 14, 2011, we entered into a board of directors offer letter with Mr. Strohm, a member of our board of directors. On August 25, 2011, pursuant to the offer letter, the board of directors granted Mr. Strohm 50,000 shares of common stock under the 2003 Plan at a purchase price of $10.70 per share, which reflects the fair value of our common stock as determined by the board of directors on the date of grant. Mr. Strohm purchased such shares on August 31, 2011. We shall have a right of repurchase with respect to such shares, with such right lapsing as to 25% of such shares after 12 months of continuous service on the board, with the remaining 75% lapsing in equal monthly installments over the next three years if Mr. Strohm continues to serve on the board. In addition, if we are subject to a change of control, our right of repurchase on 100% of the shares still subject to repurchase shall immediately lapse.

On July 20, 2011, we entered into a board of directors offer letter with Mr. Slootman, a member of our board of directors. On August 25, 2011, pursuant to the offer letter, the board of directors granted Mr. Slootman 40,000 shares of common stock under the 2003 Plan at a purchase price of $10.70 per share, which reflects the fair value of our common stock as determined by the board of directors on the date of grant. Mr. Slootman purchased such shares on September 2, 2011. We shall have a right of repurchase with respect to such shares, with such right lapsing as to 25% of such shares after 12 months of continuous service on the board, with the remaining 75% lapsing in equal monthly installments over the next three years if Mr. Slootman continues to serve on the board. In addition, if we are subject to a change of control, our right of repurchase on 100% of the shares still subject to repurchase shall immediately lapse.

In connection with this offering and pursuant to their offer letters, we plan to offer Mr. Strohm and Mr. Slootman the opportunity to purchase 25,000 shares of common stock at the initial public offering price. Such shares would be issued pursuant to the 2011 Plan and would be subject to the lock-up restrictions described in the section entitled “Shares Eligible for Future Sale.”

 

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Director Compensation Table

The following table sets forth information with respect to the compensation earned by our non-employee directors during the fiscal year ended December 31, 2010.

 

Name

   Option Awards ($)(1)      Total ($)  

Michael Boodaei

     —           —     

Asheem Chandna

     —           —     

Theresia Gouw Ranzetta

     —           —     

Steve Krausz

     —           —     

Albert A. Pimentel(2)

   $ 76,788       $ 76,788   

Ray Rothrock(3)

     —           —     

Frank Slootman(4)

     —           —     

David N. Strohm(4)

     —           —     

 

(1) This column reflects the compensation expense calculated in accordance with FASB ASC 718, excluding the effect of estimated forfeitures. See Note 13 of “Notes to Consolidated Financial Statements” for a discussion of the assumptions made by the Company in determining the valuation of option awards.
(2) Mr. Pimentel was appointed to the board of directors, effective June 4, 2010. As of December 31, 2010, he held 60,000 unvested shares of common stock, owned of record by the Pimentel Family Trust U/D/T dated April 24, 1991 for which Albert A. Pimentel and Laurie Jean Pimentel serve as trustees.
(3) Mr. Rothrock resigned from our board of directors, effective March 11, 2010.
(4) Messrs. Slootman and Strohm joined our board of directors, effective August 13, 2011.

 

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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

In addition to the director and executive officer compensation arrangements discussed above in the section entitled “Compensation,” the following is a description of transactions, or series of related transactions, since January 1, 2008, to which we were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which the other parties included or will include our directors, executive officers, holders of 5% or more of our voting securities (each a “Beneficial Owner”) or any member of the immediate family of any of the foregoing persons. The following discussion assumes a 1-for-2 reverse split of our issued and outstanding preferred stock and common stock to be effected prior to the effectiveness of this registration statement, but does not give effect to the conversion of our preferred stock into shares of common stock in connection with this offering.

Private Placements of Securities

Series D Preferred Stock Issuance and Sale

On April 2, 2008 and July 10, 2008, we sold an aggregate of 1,635,969 shares of our Series D convertible preferred stock, $0.0001 par value per share (the “Series D Preferred Stock” and such transaction, “Series D Preferred Stock Issuance and Sale” ) in private placement transactions. All shares of our Series D Preferred Stock were sold at a per share price of $12.2584. The purchase price of the Series D Preferred Stock was determined based on a number of factors, including the status of our business and results of operations, our expectations for the future, discussions between third parties and management with respect to prices at which such third parties would be willing to purchase our Series D Preferred Stock and negotiations between our management, board of directors, then-current investors and Meritech Capital Partners. Prior to the sale of our Series D Preferred Stock, Meritech Capital Partners did not hold any equity interest in the Company, nor did any of its affiliates serve as a member of our board of directors.

The following table summarizes the participation in the Series D Preferred Stock Issuance and Sale by any of our current directors, executive officers, Beneficial Owners or any member of the immediate family of any of the foregoing persons:

 

Name

   Aggregate Consideration
Paid
     Shares of Series D
Preferred Stock
 

Accel VIII, L.P. and affiliated entities (collectively, “Accel Partners”)(1)

   $ 4,550,079.05         371,179   

Greylock XII Limited Partnership and affiliated entities (collectively, “Greylock Partners”)(2)

   $ 1,658,040.54         135,257   

Shlomo Kramer

   $ 1,072,168.70         87,464   

U.S. Venture Partners VIII, L.P. and affiliated entities (collectively, “USVP”)(3)

   $ 2,356,389.35         192,226   

Venrock Associates III, L.P. and affiliated entities (collectively, “Venrock”)(4)

   $ 2,363,321.47         192,790   
  

 

 

    

 

 

 

TOTAL:

   $ 11,999,999.11         978,916   

 

(1)

Includes 289,298 shares owned of record by Accel VIII L.P., (ii) 56,827 shares owned of record by Accel Internet Fund IV L.P. and (iii) 25,054 shares owned of record by Accel Investors 2002 L.L.C. Accel VIII Associates L.L.C. (“A8A”) is the General Partner of Accel VIII L.P. and Accel Internet Fund IV L.P. and has the sole voting and investment power with respect to those entities. James W. Breyer, Arthur C. Patterson, Theresia Gouw Ranzetta, one of our directors, and James R. Swartz are the Managing Members of A8A and Accel Investors 2002 L.L.C. and share voting and investment powers in such entities.

 

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(2) Includes (i) 115,645 shares owned of record by Greylock XII Limited Partnership, (ii) 12,849 shares owned of record by Greylock XII-A Limited Partnership and (iii) 6,763 shares owned of record by Greylock XII Principals LLC. Greylock XII GP LLC is the General Partner of Greylock XII LP and Greylock XII-A LP and as such may be deemed to have indirect beneficial ownership of an indeterminate amount of such shares. William Helman, Aneel Bhusri, David Sze and Don Sullivan are the Senior Managing Members of Greylock XII GP LLC and may be deemed to share voting and investment power over the shares held by the foregoing Greylock entities. Asheem Chandna and David N. Strohm, two of our directors, are Partners at Greylock Partners.
(3) Includes (i) 187,797 shares owned of record by U.S. Venture Partners VIII, L.P., (ii) 1,813 shares owned of record by USVP VIII Affiliates Fund, L.P., (iii) 1,736 shares owned of record by USVP Entrepreneur Partners VIII-A, L.P., and (iv) 880 shares owned of record by USVP Entrepreneur Partners VIII-B, L.P. Presidio Management Group VIII, L.L.C. (“PMG”), a Delaware limited liability company, is the General Partner of each of the foregoing USVP entities. The Managing Members of PMG VIII are Irwin Federman, Winston Fu, Steven Krausz, David Liddle, Jonathan Root, Christopher Rust, Casey Tansey and Philip Young and may be deemed to share voting and dispositive power over the shares held by the forgoing USVP entities. Steven Krausz is one of our directors and a Managing Member of PMG.
(4) Includes (i) 154,233 shares owned of record by Venrock Associates III, L.P. (“VA III”), (ii) 34,702 shares owned of record by Venrock Associates and (iii) 3,855 shares owned of record by Venrock Entrepreneurs Fund III, L.P. (“VEF III”). Venrock Management III, LLC, a Delaware limited liability company, is the sole General Partner of VA III. VEF Management III, LLC, a Delaware limited liability company, is the sole General Partner of VEF III. Michael Brooks, Anthony Evnin, Bryan Roberts, Ray Rothrock and Mike Tyrrell are the general partners of Venrock Associates and the members of Venrock Management III, LLC and VEF Management III, LLC and may be deemed to share voting and investment power in such entities.

Transactions With Our Executive Officers, Directors and Beneficial Owners

Indemnification Agreements

We have entered into indemnification agreements with each of our directors and executive officers. These agreements require us to indemnify these individuals and, in certain cases, affiliates of such individuals, to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified.

Registration Rights

Mr. Kramer, our President, Chief Executive Officer and director, and each of the Beneficial Owners are party to agreements providing for rights to register under the Securities Act an aggregate of 10,773,177 shares of our capital stock. For more information regarding the registration rights granted pursuant to these agreements, see the section entitled “Description of Capital Stock—Registration Rights.”

Change in Control and Severance Agreements

We have entered into change in control agreements and severance agreements with certain of our officers, which provide for severance benefits and acceleration of the vesting of awards. For more information regarding these agreements, see the sections entitled “Compensation—Employment, Severance and Change in Control Agreements” and “Compensation—Potential Payments Upon Termination or Change in Control.”

 

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Restricted Stock and Stock Option Awards

For information regarding restricted stock and stock option awards granted to our named executive officers and directors, see the sections entitled “Compensation—Executive Compensation Program Elements,” “Compensation—Outstanding Equity Awards at Fiscal Year End,” “Compensation—Employment, Severance and Change in Control Agreements” and “Compensation—Director Compensation.”

Common Stock Issued Under the 2011 Plan in Connection with our Initial Public Offering

For information regarding the common stock we plan to issue under the 2011 Plan to certain of our directors in connection with this offering, see the section entitled “Compensation—Director Compensation.”

Stock Option Repricing

On October 29, 2008, the board of directors lowered the exercise price of certain stock options granted to employees (including certain of our named executive officers) on May 29, 2008 and August 6, 2008 from $2.04 per share to $1.64 per share. Options exercisable for 30,000 and 112,500 shares of common stock, held by Ralph Pisani and Sunil Nagdev, respectively, each of whom were or are our executive officers, were repriced from $2.04 per share to $1.64 per share. The board of directors adjusted the exercise price of such options to the fair market value of the underlying shares of common stock based upon an independent third party valuation of the Company’s common stock. This adjustment was undertaken because the board of directors determined that such a repricing was appropriate for retention purposes.

Transactions With Incapsula, Inc.

On November 5, 2009, we licensed certain intellectual property to Incapsula, Inc., a company formed by Gur Shatz, one of our former employees. The license agreement granted a worldwide, non-exclusive, irrevocable, non-transferable and non-sublicensable license to certain portions of our technology and know-how for Incapsula to use in developing its SaaS implementation of web application firewalls. Incapsula agreed to indemnify us against any claims related to Incapsula’s use of the licensed technology. As consideration for entering into this license agreement, we were issued 5,000,000 shares of Incapsula’s Series A Preferred Stock, representing a 58% ownership interest of Incapsula on a shares outstanding basis at the time of issuance. As of the date of our initial acquisition of shares of Incapsula, the remaining 42% ownership interest of Incapsula was owned by Mr. Shatz.

In connection with the issuance of the Incapsula Series A Preferred Stock to us on November 5, 2009, we entered into an investors’ rights agreement, a first refusal and co-sale agreement and a voting agreement with Incapsula and Mr. Shatz. Under the investors’ rights agreement, we have a right of first negotiation, which requires Incapsula to notify us of any acquisition proposal and provides us with an exclusive period to negotiate and make an alternative acquisition proposal. In addition, we have the right to acquire Incapsula during the five-year period beginning on November 5, 2013 in exchange for payment of Incapsula’s enterprise value, as calculated under the terms of the investors’ rights agreement.

On November 5, 2009, Shlomo Kramer, our President and Chief Executive Officer, was appointed to the Incapsula board of directors and on November 17, 2009, Mark Kraynak, our Vice President, Worldwide Marketing, was appointed to the Incapsula board of directors. On November 16, 2009, Mr. Kramer loaned $600,000 to Incapsula pursuant to a convertible promissory note with an interest rate of 6%. A total of $11,145.21 in interest accrued under the note prior to its repayment by Incapsula, which occurred on March 9, 2010. All interest due and the principal balance of the loan has been repaid. The convertible promissory note has been terminated and there are no longer any obligations thereunder or in connection with Mr. Kramer’s loan.

 

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On March 9, 2010, we purchased an additional 6,666,666 shares of Incapsula’s Series A Preferred Stock for $2,999,999.70, increasing our ownership interest in Incapsula to 76% on a shares outstanding basis on the date we made this additional investment. We also agreed, subject to Incapsula achieving certain milestones with respect to its operations, customers and product development before September 9, 2011, to purchase $7,000,000 worth of Incapsula’s Series A-1 Preferred Stock. In July 2011, Incapsula achieved the performance milestones including:

 

  Ÿ  

developing a system having at least 100 active customers;

 

  Ÿ  

engaging two channel partners;

 

  Ÿ  

meeting operational milestones with respect to research and development and marketing;

 

  Ÿ  

preparing a 24 month financial plan; and

 

  Ÿ  

reaching product development goals with respect to certain functioning components and a system capable of supporting multiple users and proxies.

As a result of Incapsula’s achievement of such performance milestones, during the quarter ended September 30, 2011 we purchased 4,375,000 shares of Incapsula’s Series A-1 Preferred Stock for $3.5 million, increasing our ownership interest in Incapsula to 82% on a shares outstanding basis on the date we made this additional investment. In addition, we will invest $3.5 million in Incapsula, which we expect to fund from the net proceeds to us from this offering, and will receive in exchange an additional 4,375,000 shares of Incapsula’s Series A-1 Preferred Stock.

On December 31, 2010, we entered into a license agreement with Incapsula under which, subject to certain exceptions, we agreed to provide Incapsula with a worldwide, non-exclusive, royalty free, limited license to access our ThreatRadar feed of internet protocol addresses, attack patterns and other identification data and Incapsula agreed to provide us a worldwide, non-exclusive, royalty free, limited license to use its list of internet protocol addresses. The license agreement has an initial term of one year and automatically renews each year thereafter unless either party provides 30 days prior notice that it no longer wishes to renew the agreement.

On March 2, 2011, we entered into an affiliate and resale agreement with Incapsula. Under this agreement, we market, promote and/or resell Incapsula’s services to our existing and potential partners and customers in exchange for a share of revenues. The agreement has an initial term of two years and automatically renews each year thereafter unless either party provides six months prior notice that it no longer wishes to renew the agreement. No material amounts have been earned to date under this agreement.

Participation in our Initial Public Offering

Certain entities associated with Accel Partners, Greylock Partners, Meritech Capital Partners, U.S. Venture Partners and Venrock and Shlomo Kramer, our President and Chief Executive Officer, each of which are our existing stockholders, have indicated an interest in purchasing up to an aggregate of approximately $15,000,000 of our common stock in this offering at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, these existing stockholders may elect not to purchase shares in this offering or the underwriters may elect not to sell any shares in this offering to such stockholders. The underwriters will receive the same discount from any shares of our common stock purchased by such stockholders as they will from any other shares of our common stock sold to the public in this offering. Any shares purchased by such stockholders will be subject to lock-up restrictions described in the section entitled “Shares Eligible for Future Sale.”

 

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Review, Approval and Ratification of Transactions with Related Parties

Our board of directors reviews and approves transactions with directors, officers, and Beneficial Owners, each, a related party. Prior to this offering, prior to our board of directors’ consideration of a transaction with a related party, the material facts as to the related party’s relationship or interest in the transaction have been disclosed to our board of directors, and the transaction has not been considered approved by our board of directors unless a majority of the directors who are not interested in the transaction approve the transaction. Following this offering, we intend to put into place a related party transactions policy which will require, among other items, that such transactions must be approved by our audit committee or another independent body of our board of directors.

 

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information with respect to the beneficial ownership of our common stock, as of September 30, 2011, the most recent practicable date, and as adjusted to reflect the sale of common stock offered by us in this offering, for:

 

  Ÿ  

each beneficial owner of 5% or more of our outstanding common stock;

 

  Ÿ  

each of our named executive officers and directors;

 

  Ÿ  

all of our executive officers and directors as a group; and

 

  Ÿ  

each of the selling stockholders.

Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include shares of common stock issuable upon the exercise of stock options that are immediately exercisable or exercisable within 60 days after September 30, 2011. Except as otherwise indicated, all of the shares reflected in the table are shares of common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.

Percentage ownership calculations for beneficial ownership prior to this offering are based on 17,351,695 shares outstanding as of September 30, 2011, assuming the conversion of all of the outstanding convertible preferred stock. Percentage ownership calculations for beneficial ownership after this offering are based on shares outstanding after this offering, assuming no exercise of the underwriters’ option to purchase additional shares and no purchase of shares in the offering by any existing stockholders. Except as otherwise indicated in the table below, addresses of named beneficial owners are in care of Imperva, Inc., 3400 Bridge Parkway, Suite 200, Redwood Shores, CA 94065.

In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of September 30, 2011. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Shares beneficially owned prior to this offering reflects our planned 1-for-2 reverse stock split to be effected prior to the effectiveness of this registration statement.

 

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Because the selling stockholders may offer all or a portion or their shares at any time and from time to time after the date hereof, we cannot estimate the number of shares of common stock that a selling stockholder will beneficially own after termination of sales under this prospectus. However, for the purposes of the table below, we have assumed that, after completion of the offering, none of the shares covered by this prospectus will be held by the selling stockholders.

 

    Number of Shares
Beneficially Owned
    Number of
Shares
Offered
    Percentage of Common Stock
Beneficially Owned
    Percentage of
Common Stock
Beneficially
Owned if
Option to
Purchase
Additional
Shares is
Exercised
 

Name of Beneficial Owner

  Before
Offering
    After
Offering
      Before
Offering
    After Offering    

5% or Greater Stockholders:

           

Entities associated with Accel Partners(1)(16)

    3,809,433        3,809,433        —          22.0     17.2     16.7

Entities associated with Greylock Partners(2)(16)

    1,388,147        1,388,147        —          8.0     6.3     6.1

Entities associated with U.S. Venture Partners(3)(16)

    1,972,824        1,972,824        —          11.4     8.9     8.6

Entities associated with Venrock(4)(16)

    1,978,625        1,978,625        —          11.4     9.0     8.7

Shlomo Kramer(5)(16)

    3,523,391        3,523,391        —          20.3     15.9     15.4

All 5% or greater stockholders as a group

    12,672,420        12,672,420        —          73.0     57.3     55.5

Other Named Executive

Officers and Directors:

           

Terrence J. Schmid(6)

    52,500        52,500        —          *          *          *     

Ralph Pisani(7)

    54,530        54,530        —          *          *          *     

Sunil Nagdev

    73,437        73,437        —          *          *          *     

Jason Forget(8)

    46,404        46,404        —          *          *          *     

Michael Boodaei(9)

    962,500        837,500        125,000        5.5     3.8     3.7

Asheem Chandna(2)(10)

    1,495,147        1,495,147        —          8.6     6.8     6.5

Theresia Gouw Ranzetta(1)

    3,809,433        3,809,433        —          22.0     17.2     16.7

Steven Krausz(3)

    1,972,824        1,972,824        —          11.4     8.9     8.6

Albert A. Pimentel(11)

    60,000        60,000        —          *          *          *     

Frank Slootman(12)

    40,000        65,000 (15)      —          *          *          *     

David N. Strohm(13)

    50,000        75,000 (15)      —          *          *          *     

All named executive officers and directors as a group (12 persons)

    12,140,166        12,065,166        125,000        69.5     54.3     52.5

Additional Selling Stockholders:

           

Amichai Shulman

Assets 2000 Ltd(14).

    962,500        837,500        125,000        5.5     3.8     3.7

 

* Represents beneficial ownership of less than 1% of the shares of common stock.
(1)

Includes (i) 1,558,800 shares of common stock issuable upon conversion of Series A convertible preferred stock, 907,091 shares of common stock issuable upon conversion of Series B convertible preferred stock, 213,884 shares of common stock issuable upon conversion of Series C convertible preferred stock and 289,298 shares of common stock issuable upon conversion of

 

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Series D convertible preferred stock, all owned of record by Accel VIII L.P., (ii) 306,200 shares of common stock issuable upon conversion of Series A convertible preferred stock, 178,183 shares of common stock issuable upon conversion of Series B convertible preferred stock, 42,014 shares of common stock issuable upon conversion of Series C convertible preferred stock and

  56,827 shares of common stock issuable upon conversion of Series D convertible preferred stock, all owned of record by Accel Internet Fund IV L.P. and (iii) 135,000 shares of common stock issuable upon conversion of Series A convertible preferred stock, 78,559 shares of common stock issuable upon conversion of Series B convertible preferred stock, 18,523 shares of common stock issuable upon conversion of Series C convertible preferred stock and 25,054 shares of common stock issuable upon conversion of Series D convertible preferred stock, all owned of record by Accel Investors 2002 L.L.C. Accel VIII Associates L.L.C. (“A8A”) is the General Partner of Accel VIII L.P. and Accel Internet Fund IV L.P. and has the sole voting and investment power with respect to those entities. James W. Breyer, Arthur C. Patterson, Theresia Gouw Ranzetta, a director of Imperva, and James R. Swartz are the Managing Members of A8A and Accel Investors 2002 L.L.C. and share voting and investment powers in such entities. The address for Accel Partners is 428 University Avenue, Palo Alto, CA 94301.
(2) Includes (i) 1,071,222 shares of common stock issuable upon conversion of Series C convertible preferred stock and 115,645 shares of common stock issuable upon conversion of Series D convertible preferred stock, all owned of record by Greylock XII Limited Partnership, (ii) 119,024 shares of common stock issuable upon conversion of Series C convertible preferred stock and 12,849 shares of common stock issuable upon conversion of Series D convertible preferred stock, all owned of record by Greylock XII-A Limited Partnership and (iii) 62,644 shares of common stock issuable upon conversion of Series C convertible preferred stock and 6,763 shares of common stock issuable upon conversion of Series D convertible preferred stock, all owned of record by Greylock XII Principals LLC. Greylock XII GP LLC is the General Partner of Greylock XII Limited Partnership and Greylock XII-A Limited Partnership and as such may be deemed to have indirect beneficial ownership of an indeterminate amount of such shares. William Helman, Aneel Bhusri, David Sze and Don Sullivan are the Senior Managing Members of Greylock XII GP LLC and may be deemed to share voting and investment power over the shares held by the foregoing Greylock entities. Asheem Chandna and David N. Strohm each a director of Imperva, are Partners at Greylock Partners. The address for Greylock Partners is 2550 Sand Hill Road, Menlo Park, CA 94025.
(3)

Includes (i) 1,279,659 shares of common stock issuable upon conversion of Series B convertible preferred stock, 459,921 shares of common stock issuable upon conversion of Series C convertible preferred stock and 187,797 shares of common stock issuable upon conversion of Series D convertible preferred stock, all owned of record by U.S. Venture Partners VIII, L.P., (ii) 12,352 shares of common stock issuable upon conversion of Series B convertible preferred stock, 4,439 shares of common stock issuable upon conversion of Series C convertible preferred stock and 1,813 shares of common stock issuable upon conversion of Series D convertible preferred stock, all owned of record by USVP VIII Affiliates Fund, L.P., (iii) 11,827 shares of common stock issuable upon conversion of Series B convertible preferred stock, 4,251 shares of common stock issuable upon conversion of Series C convertible preferred stock and 1,736 shares of common stock issuable upon conversion of Series D convertible preferred stock, all owned of record by USVP Entrepreneur Partners VIII-A, L.P., and (iv) 5,995 shares of common stock issuable upon conversion of Series B convertible preferred stock, 2,154 shares of common stock issuable upon conversion of Series C convertible preferred stock and 880 shares of common stock issuable upon conversion of Series D convertible preferred stock, all owned of record by USVP Entrepreneur Partners VIII-B, L.P. Presidio Management Group VIII, L.L.C. (“PMG”), a Delaware limited liability company, is the General Partner of each of the foregoing USVP entities. The Managing Members of PMG are Irwin Federman, Winston Fu, Steven Krausz, David Liddle, Jonathan Root, Christopher Rust, Casey Tansey and Philip Young and may be deemed to share voting and dispositive power over the shares held by the foregoing USVP

 

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entities. Steven Krausz is a director of Imperva and a Managing Member of PMG. The address for USVP is 2735 Sand Hill Road, Menlo Park, CA 94025.

(4) Includes (i) 1,051,200 shares of common stock issuable upon conversion of Series B convertible preferred stock, 377,469 shares of common stock issuable upon conversion of Series C convertible preferred stock and 154,233 shares of common stock issuable upon conversion of Series D convertible preferred stock, all owned of record by Venrock Associates III, L.P. (“VA III”), (ii) 236,520 shares of common stock issuable upon conversion of Series B convertible preferred stock, 84,930 shares of common stock issuable upon conversion of Series C convertible preferred stock and 34,702 shares of common stock issuable upon conversion of Series D convertible preferred stock, all owned of record by Venrock Associates and (iii) 26,280 shares of common stock issuable upon conversion of Series B convertible preferred stock, 9,436 shares of common stock issuable upon conversion of Series C convertible preferred stock and 3,855 shares of common stock issuable upon conversion of Series D convertible preferred stock, all owned of record by Venrock Entrepreneurs Fund III, L.P (“VEF III”). Venrock Management III, LLC, a Delaware limited liability company, is the sole General Partner of VA III. VEF Management III, LLC, a Delaware limited liability company, is the sole General Partner of VEF III. Michael Brooks, Anthony Evnin, Bryan Roberts, Ray Rothrock and Mike Tyrrell are the general partners of Venrock Associates and the members of Venrock Management III, LLC and VEF Management III, LLC and may be deemed to share voting and investment power in such entities. The address for Venrock is 3340 Hillview Avenue, Palo Alto, CA 94304.
(5) Includes (i) 1,215,204 shares of common stock owned of record by Mr. Kramer, of which 395,541 shares are subject to the Company’s right of repurchase, and (ii) 1,410,542 shares of common stock, 333,333 shares of common stock issuable upon conversion of Series A convertible preferred stock, 204,333 shares of common stock issuable upon conversion of Series B convertible preferred stock, 272,515 shares of common stock issuable upon conversion of Series C convertible preferred stock and 87,464 shares of common stock issuable upon conversion of Series D convertible preferred stock, all owned of record by HAPRI LIMITED, an investment holding company. Mr. Kramer is one of two directors of HAPRI LIMITED, with Amir Rapoport, the Kramer family office Chief Financial Officer, being the other director. All of HAPRI LIMITED’s shares are ultimately controlled by a trust of which Mr. Kramer is the sole grantor and sole beneficiary during his life. The address for HAPRI LIMITED is PFD Corporate Services (BVI) Limited, Tropic Isle Building, P.O. Box 3331, Road Town, Tortola, British Virgin Islands VG 1110.
(6) Includes options to purchase 52,500 shares of common stock that are exercisable within 60 days of September 30, 2011 owned of record by Mr. Schmid.
(7) Includes options to purchase 54,530 shares of common stock that are exercisable within 60 days of September 30, 2011 owned of record by Mr. Pisani.
(8) Includes 27,375 shares of common stock held by Jason Forget and Virginie Forget as joint tenants with the right of survivorship and options to purchase 9,655 shares of common stock that are exercisable within 60 days of September 30, 2011 owned of record by Mr. Forget.
(9) Includes 462,500 shares of common stock owned of record by Michael (Mickey) Boodaei Assets 2000 Ltd. and 500,000 shares of common stock owned of record by Michael (Mickey) Boodaei Holdings 2000 Ltd.
(10) Includes 107,000 shares of common stock owned of record by Asheem Chandna.
(11) Includes 60,000 shares of common stock owned of record by the Pimentel Family Trust U/D/T dated April 24, 1991 for which Albert A. Pimentel and Laurie Jean Pimentel serve as trustees.
(12) Includes 40,000 shares of common stock owned of record by Mr. Slootman, all shares of which are subject to the Company’s right of repurchase.
(13) Includes 50,000 shares of common stock owned of record by Mr. Strohm, all shares of which are subject to the Company’s right of repurchase.
(14) Includes 462,500 shares of common stock owned of record by Amichai Shulman Assets 2000 Ltd. and 500,000 shares of common stock owned of record by Amichai Shulman Holdings 2000 Ltd.

 

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(15) Includes 25,000 shares of common stock that we plan to offer to Messrs. Slootman and Strohm to purchase at the initial public offering price pursuant to their board of director offer letters. Such shares would be issued pursuant to our 2011 Stock Option and Incentive Plan.
(16) Certain entities, including entities associated with Accel Partners, Greylock Partners, Meritech Capital Partners, U.S. Venture Partners and Venrock, and Shlomo Kramer, our President and Chief Executive Officer, each of which are our existing stockholders, have indicated an interest in purchasing up to an aggregate of approximately $15,000,000 of our common stock in this offering at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, these existing stockholders may elect not to purchase shares in this offering or the underwriters may elect not to sell any shares in this offering to such stockholders. However, if any shares are purchased by these stockholders, the number of shares of common stock beneficially owned after this offering and the percentage of common stock beneficially owned after this offering will differ from that set forth in the table above. Assuming the purchase of all 1,000,000 shares by one of these stockholders, the number of shares of common stock beneficially owned by such stockholder after this offering would increase by 1,000,000 shares and the percentage of common stock beneficially owned by such stockholder after this offering would increase by 4.5%.

 

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DESCRIPTION OF CAPITAL STOCK

The following descriptions are summaries of the material terms of our restated certificate of incorporation and amended and restated bylaws, which will be effective upon consummation of this offering. These descriptions are qualified in their entirety by reference to the restated certificate of incorporation and amended and restated bylaws, copies of which will be filed with the SEC as exhibits to the registration statement of which this prospectus is a part, and applicable law. The descriptions of the common stock and preferred stock give effect to changes to our capital structure that will occur upon the closing of this offering. We refer in this section to our restated certificate of incorporation as our certificate of incorporation, and we refer to our amended and restated bylaws as our bylaws.

General

Upon completion of this offering, our authorized capital stock will consist of 145,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share, all of which shares of preferred stock will be undesignated.

As of September 30, 2011,17,351,695 shares of our common stock were outstanding and held by approximately 240 stockholders of record. This amount assumes the conversion of all outstanding shares of our preferred stock and accumulated dividends thereon into common stock, which will occur immediately prior to the closing of this offering. In addition, as of September 30, 2011, we had outstanding options to purchase 2,944,899 shares of our common stock under our 2003 Stock Option Plan at a weighted average exercise price of $3.48 per share, 1,149,366 of which were exercisable, and outstanding warrants to purchase 19,999 shares of our common stock.

Common Stock

The holders of our common stock are entitled to one vote for each share held on all matters properly submitted to a vote of the stockholders. The holders of our common stock do not have any cumulative voting rights. Holders of our common stock are entitled to receive ratably any dividends declared by the board of directors out of funds legally available for that purpose, subject to any preferential dividend rights of any outstanding preferred stock. Our common stock has no preemptive rights, conversion rights or other subscription rights or redemption or sinking fund provisions.

In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in all assets remaining after payment of all debts and other liabilities and any liquidation preference of any outstanding preferred stock. The shares to be issued by us in this offering will be, when issued and paid for, validly issued, fully paid and non-assessable.

Preferred Stock

Our board of directors is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock, in one or more series, each series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences as our board of directors determines. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. We currently have no shares of preferred stock outstanding and we have no present plans to issue any shares of preferred stock.

 

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Warrants

As of September 30, 2011, two warrants exercisable for an aggregate of up to 19,999 shares of our common stock were outstanding. These warrants were issued in connection with a loan and security agreement, are immediately exercisable at an exercise price of $3.00 per share and will expire on December 22, 2015. Each of the warrants contains a customary net share issuance feature, which allows the warrant holder to pay the exercise price of the warrant by forfeiting a portion of the exercised warrant shares with a value equal to the aggregate exercise price. In addition, if the fair market value of the warrants at the expiration date is greater than the exercise price, any unexercised warrants will automatically be converted into shares via the net issuance feature.

Registration Rights

Holders of 10,773,177 shares of our common stock, after giving effect to the conversion of our outstanding preferred stock and accumulated dividends thereon into common stock upon completion of this offering, have rights, under the terms of an investor rights agreement between us and these holders, to require us to file registration statements under the Securities Act, subject to limitations and restrictions, or request that their shares be covered by a registration statement that we are otherwise filing, subject to specified exceptions. We refer to these shares as registrable securities. The investor rights agreement does not provide for any liquidated damages, penalties or other rights in the event we do not file a registration statement. These rights will continue in effect following this offering. We entered into the investor rights agreement in connection with our Series A, Series B, Series C and Series D convertible preferred stock financings. We expect to amend the investor rights agreement in connection with this offering to eliminate all rights of investors and all of our obligations under the agreement except for the registration rights described in this prospectus. Mr. Kramer, our President, Chief Executive Officer and director, each of the beneficial owners of 5% or more of our voting securities and other holders of our convertible preferred stock and warrants are parties to the investor rights agreement.

Demand Registration Rights.     At any time after the earlier of (i) six months following the completion of this offering or (ii) April 2, 2012, subject to certain exceptions, the holders of 30% of the registrable securities have the right to demand that we file a registration statement covering the offering and sale of registrable securities then outstanding with an anticipated aggregate offering price of at least $10,000,000. In the event we register securities in connection with an underwritten offering, the underwriters will have the right to limit the number of shares included in such offering.

We have the ability to delay the filing of such registration statement under specified conditions, such as (1) during the period starting with the date 60 days prior to the Company’s good faith estimate of the date of filing of and ending on the date 180 days following the effective date of this offering or (2) if our board of directors deems it advisable to delay such filing. The latter postponement cannot exceed 90 days during any twelve-month period. We are not obligated to file a registration statement on more than two occasions upon the request of the holders of 30% of the registrable securities.

Form S-3 Registration Rights.     If we are eligible to file a registration statement on Form S-3, the holders of the registrable securities described above have the right, on one or more occasions, to request registration on Form S-3 of the sale of the registrable securities held by such holder provided (1) the request or requests are made by holders of at least 20% of the registrable securities and (2) such securities are anticipated to have an aggregate sale price (net of underwriting discounts and commissions, if any) of at least $5,000,000. In the event we register securities in connection with an underwritten offering, the underwriters will have the right to limit the number of shares included in such offering.

We have the ability to delay the filing of such registration statement under specified conditions, such as (1) during the period starting with the date 60 days prior to the Company’s good faith estimate

 

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of the date of filing of and ending on the date 180 days following the effective date of this offering or (2) if our board of directors deems it advisable to delay such filing. The latter postponement cannot exceed 90 days during any 12 month period. We are not obligated to effect more than one registration of registrable securities on Form S-3 in any 12 month period.

Piggyback Registration Rights.     If we register any securities for public sale, including pursuant to any stockholder-initiated demand, the holders of registrable securities will have the right to include their shares in the registration statement, subject to customary exceptions. In the event we register securities in connection with an underwritten offering, the underwriters will have the right to limit the number of shares included in such offering.

Expenses of Registration.     We will pay all registration expenses, other than underwriting discounts and commissions and stock transfer taxes, related to any demand, Form S-3 or piggyback registration, including reasonable attorney’s fees and disbursements of one counsel for the holders of registrable securities.

Indemnification.     The investor rights agreement contains customary cross-indemnification provisions, under which we are obligated to indemnify the selling stockholders in the event of material misstatements or omissions in the registration statement attributable to us, and they are obligated to indemnify us for material misstatements or omissions attributable to them.

Expiration of Registration Rights .    The registration rights granted under the investor rights agreement will terminate on the earlier of (i) the fifth anniversary of the completion of this offering and (ii) with respect to any holder of registrable securities, the date on which such holder holds one percent or less of our outstanding common stock and all registrable securities held by such holder can be sold in a three-month period without registration in reliance on Rule 144 under the Securities Act.

Anti-Takeover Effects of our Certificate of Incorporation and Bylaws and Delaware Law

Our certificate of incorporation and bylaws include a number of provisions that may have the effect of delaying, deferring or preventing another party from acquiring control of us and encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. These provisions include the items described below.

Board Composition and Filling Vacancies.     Our certificate of incorporation provides for the division of our board of directors into three classes serving staggered three-year terms, with one class being elected each year. Our certificate of incorporation also provides that directors may be removed only for cause and then only by the affirmative vote of the holders of 75% or more of the shares then entitled to vote at an election of directors. Furthermore, any vacancy on our board of directors, however occurring, including a vacancy resulting from an increase in the size of our board, may only be filled by the affirmative vote of a majority of our directors then in office even if less than a quorum, unless otherwise determined by our board to be filled by stockholders. The classification of directors, together with the limitations on removal of directors and treatment of vacancies, has the effect of making it more difficult for stockholders to change the composition of our board of directors.

No Written Consent of Stockholders.     Our certificate of incorporation provides that all stockholder actions are required to be taken by a vote of the stockholders at an annual or special meeting, and that stockholders may not take any action by written consent in lieu of a meeting. This limit may lengthen the amount of time required to take stockholder actions and would prevent the amendment of our bylaws or removal of directors by our stockholders without holding a meeting of stockholders.

 

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Meetings of Stockholders.     Our certificate of incorporation and bylaws provide that only the chairperson of our board, the lead independent director, if any, the chief executive offer, the president or a majority of the total authorized number of directors may call special meetings of stockholders and only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders. Our bylaws limit the business that may be conducted at an annual meeting of stockholders to those matters properly brought before the meeting.

Advance Notice Requirements.     Our bylaws establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as directors or new business to be brought before meetings of our stockholders. These procedures provide that notice of stockholder proposals must be timely given in writing to our corporate secretary prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be received at our principal executive offices not less than 75 days nor more than 105 days prior to the first anniversary date of the annual meeting for the preceding year. Our bylaws specify the requirements as to form and content of all stockholders’ notices. These requirements may preclude stockholders from bringing matters before the stockholders at an annual or special meeting.

Amendment to Certificate of Incorporation and Bylaws.     Any amendment of our certificate of incorporation must first be approved by a majority of our board of directors, and if required by law or our certificate of incorporation, must thereafter be approved by a majority of the outstanding shares entitled to vote on the amendment and, if applicable, by a majority of the outstanding shares of each class entitled to vote thereon as a class, except that the amendment of the provisions relating to stockholder action, the amendment of our bylaws board composition, director liability and the amendment of our certificate of incorporation must be approved by not less than 75% of the outstanding shares entitled to vote on the amendment voting together as a single class. Our bylaws may be amended by the affirmative vote of a majority of the directors then in office, subject to any limitations set forth in the bylaws; and may also be amended by the affirmative vote of at least 75% of the outstanding shares entitled to vote on the amendment, or, if our board of directors recommends that the stockholders approve the amendment, by the affirmative vote of the majority of the outstanding shares entitled to vote on the amendment, in each case voting together as a single class.

Undesignated Preferred Stock.     Our certificate of incorporation provides for 5,000,000 authorized shares of preferred stock. The existence of authorized but unissued shares of preferred stock may enable our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, our board of directors were to determine that a takeover proposal is not in the best interests of our stockholders, our board of directors could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group. In this regard, our certificate of incorporation grants our board of directors broad power to establish the rights and preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of common stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring or preventing a change in control of us.

Section 203 of the Delaware General Corporation Law

Upon completion of this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business

 

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combination is approved in a prescribed manner. Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:

 

  Ÿ  

before the stockholder became interested, our board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

 

  Ÿ  

upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares owned by persons who are directors and also officers, and employee stock plans, in some instances, but not the outstanding voting stock owned by the interested stockholder; or

 

  Ÿ  

at or after the time the stockholder became interested, the business combination was approved by our board of directors and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.

Section 203 defines a business combination to include:

 

  Ÿ  

any merger or consolidation involving the corporation and the interested stockholder;

 

  Ÿ  

any sale, transfer, lease, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation;

 

  Ÿ  

subject to exceptions, any transaction that results in the issuance of transfer by the corporation of any stock of the corporation to the interested stockholder;

 

  Ÿ  

subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; and

 

  Ÿ  

the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person.

New York Stock Exchange Listing

We have applied to list our common stock on the New York Stock Exchange under the trading symbol “IMPV.”

Transfer Agent and Registrar

The transfer agent and registrar for our common stock will be Mellon Investor Services LLC. The transfer agent and registrar’s address is 480 Washington Boulevard, Jersey City, NJ 07310.

 

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SHARES ELIGIBLE FOR FUTURE SALE

Immediately prior to this offering, there was no public market for our common stock. Future sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could adversely affect the market price of our common stock. Although we have applied to have our common stock approved for listing on the New York Stock Exchange, we cannot assure you that there will be an active public market for our common stock.

Upon completion of this offering and based upon 17,351,695 shares outstanding as of September 30, 2011, we will have outstanding an aggregate of 22,101,695 shares of common stock, assuming no exercise of the underwriters’ option to purchase additional shares and no exercise of outstanding stock options or warrants. Of these shares, the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased in this offering or held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, whose sales would be subject to certain limitations and restrictions described below. The remaining 17,351,695 shares of common stock held by existing stockholders will be restricted securities as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for exemption under Rules 144 or 701 under the Securities Act, which rules are summarized below, or another exemption.

As a result of the lock-up agreements described below and the provisions of Rule 144 and Rule 701 under the Securities Act, the shares of our common stock (excluding the shares sold in this offering) that will be available for sale in the public market are as follows:

 

Date of Availability of Sale

   Approximate
Number of
Shares
 

As of the date of this prospectus

     342,704   

90 days after the date of this prospectus

     361,204   

180 days after the date of this prospectus, or longer if the lock-up period is extended, although a portion of such shares held by our affiliates will be subject to volume limitations pursuant to Rule 144

     17,351,695   

Stock Plans

We intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of our common stock issuable or reserved for issuance under our stock option plans and employee stock purchase plan. The first such registration statement is expected to be filed soon after the date of this prospectus and will automatically become effective upon filing with the SEC. Accordingly, shares registered under such registration statement will be available for sale in the open market, unless such shares are subject to vesting restrictions with us or the lock-up restrictions described below.

Lock-Up Agreements

We, our officers, directors and holders of substantially all of our common stock and securities convertible into common stock, including the selling stockholders, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of J.P. Morgan Securities LLC, Deutsche Bank Securities Inc. and the Company. This consent may be given at any time. There are no agreements among J.P. Morgan Securities LLC, Deutsche Bank Securities Inc., the Company and any of our securityholders or affiliates releasing them from these lock-up agreements prior to the expiration of the 180-day period.

 

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The 180-day restricted period described in the preceding paragraph will be automatically extended if: (1) during the last 17 days of the 180-day restricted period we issue an earnings release or announce material news or a material event; or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 15-day period following the last day of the 180-day period, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event.

Rule 144

In general, under Rule 144, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, a person who is not our affiliate and has not been our affiliate at any time during the preceding three months and who is not a party to a lock-up agreement as described above will be entitled to sell any shares of our common stock that such person has beneficially owned for at least six months, including the holding period of any prior owner other than one of our affiliates, without regard to volume limitations. Sales of our common stock by any such person would be subject to the availability of current public information about us if the shares to be sold were beneficially owned by such person for less than one year.

In addition, under Rule 144, a person may sell shares of our common stock acquired from us immediately upon the closing of this offering, without regard to volume limitations or the availability of public information about us, if:

 

  Ÿ  

the person is not our affiliate and has not been our affiliate at any time during the preceding three months; and

 

  Ÿ  

the person has beneficially owned the shares to be sold for at least one year, including the holding period of any prior owner other than one of our affiliates.

Beginning 90 days after the date of this prospectus, our affiliates who have beneficially owned shares of our common stock for at least six months, including the holding period of any prior owner other than one of our affiliates, will be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

 

  Ÿ  

1% of the number of shares of our common stock then outstanding, which will equal approximately 221,017 shares immediately after this offering; and

 

  Ÿ  

the average weekly trading volume in our common stock on the New York Stock Exchange during the four calendar weeks preceding the date of filing of a Notice of Proposed Sale of Securities Pursuant to Rule 144 with respect to the sale.

Sales under Rule 144 by our affiliates are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.

Rule 701

In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering is entitled to sell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with the holding period requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the holding period, public information, volume limitation or notice filing provisions of Rule 144. The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, as amended, along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus.

 

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Registration Rights

Upon completion of this offering, the holders of 10,773,177 shares of our common stock have certain rights with respect to the registration of such shares under the Securities Act. A demand for registration may not be made until 180 days after the completion of this offering. Upon the effectiveness of a registration statement covering these shares, the shares would become freely tradable. See the section entitled “Description of Capital Stock—Registration Rights.”

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of material U.S. federal income tax considerations relating to the acquisition, ownership and disposition of our common stock issued pursuant to this offering; provided that this summary deals only with common stock held as a capital asset by a stockholder, and does not discuss the U.S. federal income tax considerations applicable to a stockholder that is subject to special treatment under U.S. federal income tax laws, including: a dealer in securities or currencies; a financial institution; a regulated investment company; a real estate investment trust; a tax-exempt organization; an insurance company; a person holding common stock as part of a hedging, integrated, conversion or straddle transaction or a person deemed to sell common stock under the constructive sale provisions of the Internal Revenue Code of 1986, as amended (the “Tax Code”); a trader in securities that has elected the mark-to-market method of accounting; a person liable for alternative minimum tax; an entity that is treated as a partnership for U.S. federal income tax purposes; a person that received such common stock in connection with services provided; a U.S. person whose “functional currency” is not the U.S. dollar; a “controlled foreign corporation”; a “passive foreign investment company”; or a U.S. expatriate.

This summary is based upon provisions of the Tax Code, and applicable regulations, rulings and judicial decisions in effect as of the date hereof. Those authorities may be changed, perhaps retroactively, or may be subject to differing interpretations, so as to result in U.S. federal income tax consequences different from those discussed below. This summary does not address all aspects of U.S. federal income tax, does not deal with all tax considerations that may be relevant to stockholders in light of their personal circumstances and does not address any state, local, foreign, gift, estate or alternative minimum tax considerations.

For purposes of this discussion, a “U.S. holder” is a beneficial holder of common stock that is: an individual citizen or resident of the United States; a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; an estate the income of which is subject to U.S. federal income taxation regardless of its source; a trust if it (i) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

For purposes of this discussion, a “non-U.S. holder” is a beneficial holder of common stock (other than a partnership or any other entity or arrangement that is treated as a partnership for U.S. federal income tax purposes) that is not a U.S. holder.

If a partnership (or an entity or arrangement that is treated as a partnership for U.S. federal income tax purposes) holds common stock, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. A partner of a partnership holding common stock is particularly urged to consult its own tax advisors.

Holders of common stock are urged to consult their own tax advisors concerning their particular U.S. federal income tax consequences in light of their specific situations, as well as the tax consequences arising under the laws of any other taxing jurisdiction.

U.S. Holders

Ownership and Disposition of common stock .    The following discussion is a summary of certain U.S. federal income tax considerations relevant to a U.S. holder of common stock.

 

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Distributions with respect to common stock, if any, will be includible in the gross income of a U.S. holder as ordinary dividend income to the extent paid out of current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. Any portion of a distribution in excess of current or accumulated earnings and profits would be treated as a return of the holder’s tax basis in its common stock and then as gain from the sale or exchange of the common stock. Under current law, if certain requirements are met, a maximum 15% U.S. federal income tax rate will apply to any dividends paid to a holder of common stock who is a U.S. individual and that is included in the U.S. holder’s income prior to January 1, 2013.

Distributions to U.S. holders that are corporate stockholders, constituting dividends for U.S. federal income tax purposes, may qualify for the 70% dividends received deduction (“DRD”), which is generally available to corporate stockholders that own less than 20% of the voting power or value of the outstanding stock of the distributing corporation. A U.S. holder that is a corporate stockholder holding 20% or more of the distributing corporation may be eligible for an 80% DRD. No assurance can be given that we will have sufficient earnings and profits (as determined for U.S. federal income tax purposes) to cause any distributions to be treated as dividends eligible for a DRD. In addition, a DRD is available only if certain holding periods and other taxable income requirements are satisfied. The length of time that a stockholder has held stock is reduced by any period during which the stockholder’s risk of loss with respect to the stock is diminished by reason of the existence of certain options, contracts to sell, short sales, or other similar transactions. Also, to the extent that a corporation incurs indebtedness that is directly attributable to an investment in the stock on which the dividend is paid, all or a portion of the DRD may be disallowed. In addition, any dividend received by a corporation may also be subject to the extraordinary distribution provisions of the Tax Code.

A U.S. holder of common stock will generally recognize gain or loss on the taxable sale, exchange, or other disposition of such stock in an amount equal to the difference between such U.S. holder’s amount realized on the sale and its tax basis in the common stock sold. A U.S. holder’s amount realized should equal the amount of cash and the fair market value of any property received in consideration of its stock. The gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the common stock is held for more than one year at the time of disposition. Capital loss can generally only be used to offset capital gain (individuals may also offset excess capital losses against up to $3,000 of ordinary income per tax year). Under current law, long-term capital gain recognized by an individual U.S. holder prior to January 1, 2013 is subject to a maximum 15% U.S. federal income tax rate. For taxable years beginning after December 31, 2012, certain U.S. holders that are individuals, estates or trusts will be required to pay up to an additional 3.8% tax on dividends and capital gains.

Non-U.S. Holders

Ownership and Disposition of common stock .    The following is a summary of certain U.S. federal tax considerations applicable to a non-U.S. holder of common stock.

Distributions treated as dividends that are paid to a non-U.S. holder, if any, with respect to the shares of common stock will be subject to withholding tax at a 30% rate (or lower applicable income tax treaty rate) unless the dividends are effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States. If a non-U.S. holder is engaged in a trade or business in the United States and dividends with respect to the common stock are effectively connected with the conduct of that trade or business and, if required by an applicable income tax treaty, are attributable to a U.S. permanent establishment, then the non-U.S. holder will be subject to U.S. federal income tax on those dividends on a net income basis (although the dividends will be exempt from the 30% U.S. federal withholding tax, provided certain certification requirements are satisfied) in the same manner as if received by a U.S. person as defined under the Tax Code. Any such effectively connected income

 

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received by a foreign corporation may, under certain circumstances, be subject to an additional branch profits tax at a 30% rate (or lower applicable income tax treaty rate). To claim the exemption from withholding with respect to any such effectively connected income, the non-U.S. holder must generally furnish to us or our paying agent a properly executed U.S. Internal Revenue Service Form W-8ECI (or applicable successor form).

A non-U.S. holder of shares of common stock who wishes to claim the benefit of an exemption or reduced rate of withholding tax under an applicable treaty must furnish to us or our paying agent a valid U.S. Internal Revenue Service Form W-8BEN (or applicable successor form) certifying such holder’s qualification for the exemption or reduced rate. If a non-U.S. holder is eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty, it may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the U.S. Internal Revenue Service.

Non-U.S. holders may recognize gain upon the sale, exchange, redemption or other taxable disposition of common stock. Such gain generally will not be subject to U.S. federal income tax unless: (i) that gain is effectively connected with the conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a U.S. permanent establishment) by a non-U.S. holder; (ii) the non-U.S. holder is a non-resident alien individual who is present in the United States for 183 days or more in the taxable year of that disposition, and certain other conditions are met; or (iii) we are or have been a “U.S. real property holding corporation” for U.S. federal income tax purposes. We believe that we are not and we do not anticipate becoming a “U.S. real property holding corporation” for U.S. federal income tax purposes.

If a non-U.S. holder is an individual described in clause (i) of the preceding paragraph, the non-U.S. holder will generally be subject to tax on the net gain at regular graduated U.S. federal income tax rates. If the non-U.S. holder is an individual described in clause (ii) of the preceding paragraph, the non-U.S. holder will generally be subject to a flat 30% tax on the gain, which may be offset by U.S. source capital losses even though the non-U.S. holder is not considered a resident of the U.S. If a non-U.S. holder is a foreign corporation that falls under clause (i) of the preceding paragraph, it will be subject to tax on its net gain in the same manner as if it were a U.S. person as defined under the Tax Code and, in addition, the non-U.S. holder may be subject to the branch profits tax at a rate equal to 30% of its effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty.

Information Reporting and Backup Withholding Tax

We report to our U.S. holders and the U.S. Internal Revenue Service the amount of dividends paid during each calendar year, and the amount of any tax withheld. All distributions to holders of common stock are subject to any applicable withholding. Under U.S. federal income tax law, interest, dividends, and other reportable payments may, under certain circumstances, be subject to “backup withholding” at the then applicable rate (currently 28%). Backup withholding generally applies to a U.S. holder if the holder (i) fails to furnish its social security number or other taxpayer identification number (“TIN”), (ii) furnishes an incorrect TIN, (iii) fails to properly report interest or dividends, or (iv) under certain circumstances, fails to provide a certified statement, signed under penalty of perjury, that the TIN provided is its correct number and that it is a U.S. person that is not subject to backup withholding. Backup withholding is not an additional tax but merely an advance payment, which may be refunded to the extent it results in an overpayment of tax and the appropriate information is supplied to the U.S. Internal Revenue Service. Certain U.S. persons are exempt from backup withholding, including corporations, and in certain circumstances, financial institutions.

We also report to our non-U.S. holders and the U.S. Internal Revenue Service the amount of dividends paid during each calendar year, and the amount of any tax withheld. These information

 

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reporting requirements apply even if no withholding was required because the distributions were effectively connected with the non-U.S. holder’s conduct of a U.S. trade or business, or withholding was reduced or eliminated by an applicable income tax treaty. This information also may be made available under a specific treaty or agreement with the tax authorities in the country in which the non-U.S. holder resides or is established. Backup withholding, however, generally will not apply to distributions to a non-U.S. holder of our common stock provided the non-U.S. holder furnishes to us or our paying agent the required certification as to its non-U.S. status, such as by providing a valid U.S. Internal Revenue Service Form W-8BEN or U.S. Internal Revenue Service Form W-8ECI, or certain other requirements are met. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the holder is a U.S. person that is not an exempt recipient.

New Legislation

Under recently enacted legislation, a relevant withholding agent may be required to withhold 30% of any dividends and the proceeds of a sale of our common stock paid after December 31, 2012 to (i) a foreign financial institution (as specially defined for this purpose) unless such foreign financial institution agrees to verify, report and disclose its U.S. accountholders and meets certain other specified requirements, or (ii) a non-financial foreign entity that is the beneficial owner of the payment unless such entity certifies that it does not have any substantial U.S. owners or provides the name, address and taxpayer identification number of each substantial U.S. owner and such entity meets certain other specified requirements. Non-U.S. holders should consult their tax advisors regarding the effect, if any, of this legislation on their ownership of our common stock.

 

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UNDERWRITING

We, the selling stockholders and the underwriters named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. J.P. Morgan Securities LLC and Deutsche Bank Securities Inc. are the representatives of the underwriters.

 

Underwriters

   Number
of
Shares

J.P. Morgan Securities LLC

  

Deutsche Bank Securities Inc.

  

RBC Capital Markets, LLC

  

Lazard Capital Markets LLC

  

Pacific Crest Securities LLC.

  
  

 

Total

  
  

 

The underwriters are committed to take and pay for all of the shares being offered, if any are taken, other than the shares covered by the option described below unless and until this option is exercised.

If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional 750,000 shares from us. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.

The following tables show the per share and total underwriting discounts and commissions to be paid to the underwriters by us and the selling stockholders. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase 750,000 additional shares.

 

Paid by us

   No
Exercise
     Full
Exercise
 

Per Share

   $                    $                

Total

   $         $     

 

Paid by the Selling Stockholders

   No
Exercise
     Full
Exercise
 

Per Share

   $                    $                

Total

   $         $     

Shares sold by the underwriters to the public, including those shares sold to certain of our existing stockholders if they purchase shares, will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $             per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. The offering of the shares by the underwriters is subject to receipt and acceptance and subject to the underwriters’ right to reject any order in whole or in part.

We and our officers, directors, and holders of substantially all of our common stock and securities convertible into our common stock, including the selling stockholders, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with

 

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the prior written consent of J.P. Morgan Securities LLC, Deutsche Bank Securities Inc. and the Company. This consent may be given at any time. There are no agreements among J.P. Morgan Securities LLC, Deutsche Bank Securities Inc., the Company and any of our stockholders or affiliates releasing them from these lock-up agreements prior to the expiration of the 180-day period. See “Shares Eligible for Future Sale” for a discussion of certain transfer restrictions.

The 180-day restricted period described in the preceding paragraph will be automatically extended if: (1) during the last 17 days of the 180-day restricted period we issue an earnings release or announce material news or a material event; or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 15-day period following the last day of the 180-day period, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release of the announcement of the material news or material event.

Prior to the offering, there has been no public market for the shares. The initial public offering price will be negotiated between us and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be our historical performance, estimates of our business potential and earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses.

We have applied to list the common stock on the New York Stock Exchange under the symbol “IMPV.” In order to meet one of the requirements for listing the common stock on the New York Stock Exchange, the underwriters have undertaken to sell lots of 100 or more shares to a minimum of 400 beneficial holders.

In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Shorts sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares from us in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase additional shares pursuant to the option granted to them. “Naked” short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.

Purchases to cover a short position and stabilizing transactions, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of our stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may

 

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be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the New York Stock Exchange, in the over-the-counter market or otherwise.

European Economic Area

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), each underwriter has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date) it has not made and will not make an offer of shares to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of shares to the public in that Relevant Member State at any time:

(a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts;

(c) to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the representatives for any such offer; or

(d) in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer of shares to the public” in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

United Kingdom

Each underwriter has represented and agreed that:

 

  (a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the shares in circumstances in which Section 21(1) of the FSMA does not apply to us; and

 

  (b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom.

 

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Hong Kong

The shares may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

Singapore

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.

Japan

The securities have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (the Financial Instruments and Exchange Law) and each underwriter has agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.

Israel

In the State of Israel, the shares of common stock offered hereby may only be offered to up to 35 investors and to the following persons or to investors that meet the criteria in Section 15A(b) of the

 

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Israeli Securities Law 5728-1968, as amended, and in written guidelines of the Israeli Securities Authority under such section. Any offeree of the shares of common stock offered hereby in the State of Israel shall be required to submit written confirmation that it falls within the scope of one of the above criteria, except if such offeree is deemed one of the 35 offerees to which the shares of common stock may be offered without reference to their qualifications as one of the entities listed above. This prospectus will not be distributed or directed to investors in the State of Israel who do not fall within one of the above criteria, except that it may be distributed to up to 35 offerees without reference to their qualifications as one of the entities listed above.

A prospectus in electronic format is being made available on Internet web sites maintained by one or more of the lead underwriters of this offering and may be made available on web sites maintained by other underwriters. Other than the prospectus in electronic format, the information on any underwriter’s web site and any information contained in any other web site maintained by an underwriter is not part of the prospectus or the registration statement of which the prospectus forms a part.

The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered.

We estimate that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $4.5 million.

We and the selling stockholders have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933.

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses.

In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve our securities and/or instruments. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

 

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LEGAL MATTERS

The validity of the shares of common stock offered by this prospectus will be passed upon for us by Goodwin Procter LLP, Menlo Park, California. Wilson Sonsini Goodrich  & Rosati, P.C., Palo Alto, California is representing the underwriters in this offering.

EXPERTS

The consolidated financial statements of Imperva, Inc. and its subsidiaries at December 31, 2010, and for the year then ended, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The consolidated financial statements of Imperva, Inc. and its subsidiaries at December 31, 2009, and for each of the two years in the period ended December 31, 2009, appearing in this prospectus and registration statement have been audited by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We filed a registration statement on Form S-1 with the Securities and Exchange Commission with respect to the registration of the common stock offered for sale with this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits to the registration statement. For further information about us, the common stock we are offering by this prospectus and related matters, you should review the registration statement, including the exhibits filed as a part of the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits that were filed with the registration statement may be inspected without charge at the public reference facilities maintained by the Securities and Exchange Commission at 100 F. Street, N.E., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the Securities and Exchange Commission upon payment of the prescribed fee. Information on the operation of the public reference facilities may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the site is http://www.sec.gov.

Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and, in accordance with such requirements, will file periodic reports, proxy statements, and other information with the Securities and Exchange Commission. These periodic reports, proxy statements, and other information will be available for inspection and copying at the regional offices, public reference facilities, and web site of the Securities and Exchange Commission referred to above. We intend to furnish our stockholders with annual reports containing consolidated financial statements audited by our independent registered accounting firm.

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

IMPERVA, INC. AND SUBSIDIARIES

Consolidated Financial Statements

Years Ended December 31, 2008, 2009 and 2010 and the

Nine Months Ended September 30, 2010 and 2011 (unaudited)

 

     Page  

Reports of Independent Registered Public Accounting Firms

     F-2   

Consolidated Balance Sheets

     F-4   

Consolidated Statements of Operations

     F-5   

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

     F-6   

Consolidated Statements of Cash Flows

     F-8   

Notes to Consolidated Financial Statements

     F-9   


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Imperva, Inc.

We have audited the accompanying consolidated balance sheet of Imperva, Inc. and subsidiaries as of December 31, 2010, and the related consolidated statements of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Imperva, Inc. and subsidiaries at December 31, 2010, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to consolidated financial statements, the Company changed its method of accounting for revenue recognition effective January 1, 2010.

Ernst & Young LLP

Redwood City, California

June 17, 2011,

except for the last paragraph of Note 1,

as to which the date is

October     , 2011

The foregoing report is in the form that will be signed upon the completion of the restatement of capital accounts described in the last paragraph of Note 1 to the financial statements.

/s/ Ernst & Young LLP

Redwood City, California

October 27, 2011

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Imperva, Inc.

We have audited the accompanying consolidated balance sheet of Imperva, Inc. and subsidiaries as of December 31, 2009, and the related consolidated statements of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Imperva, Inc. and subsidiaries at December 31, 2009, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

 

     

Kost Forer Gabbay & Kasierer

A Member of Ernst & Young Global

Tel-Aviv, Israel

June 17, 2011,

except for the last paragraph of Note 1,

as to which the date is

October     , 2011

The foregoing report is in the form that will be signed upon the completion of the restatement of capital accounts described in the last paragraph of Note 1 to the financial statements.

 

  

/s/

  

Kost Forer Gabbay & Kasierer

A Member of Ernst & Young Global

Tel-Aviv, Israel

October 27, 2011

 

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IMPERVA, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

    December 31,     September 30,
2011
    Pro Forma
Stockholders’
Equity

as of September  30,
2011
 
    2009     2010      
                (Unaudited)     (Unaudited)  

ASSETS

       

CURRENT ASSETS:

       

Cash and cash equivalents

  $ 18,587      $ 16,410      $ 13,025     

Short-term investments

    463        1,245        —       

Restricted cash

    100        996        688     

Accounts receivable, net of allowance for doubtful accounts of $368, $407 and $138 as of December 31, 2009 and 2010 and September 30, 2011 (unaudited)

    12,454        13,164        15,452     

Inventory

    594        387        488     

Deferred tax assets

    171        141        245     

Prepaid expenses and other current assets

    598        1,709        1,301     
 

 

 

   

 

 

   

 

 

   

Total current assets

    32,967        34,052        31,199     

Property and equipment, net

    2,378        4,101        4,013     

Severance pay fund

    1,568        2,204        2,532     

Restricted cash

    512        518        667     

Deferred tax assets

    20        30        38     

Other assets

    101        72        4,016     
 

 

 

   

 

 

   

 

 

   

TOTAL ASSETS

  $ 37,546      $ 40,977      $ 42,465     
 

 

 

   

 

 

   

 

 

   

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

       

CURRENT LIABILITIES:

       

Accounts payable

  $ 3,083      $ 2,516      $ 3,680     

Accrued compensation and benefits

    4,320        5,868        6,596     

Accrued and other current liabilities

    2,304        4,519        4,411     

Deferred revenue

    11,288        13,738        19,050     

Convertible preferred stock warrant liability

    55        69        223      $ —     

Convertible promissory note from related party

    600        —          —       

Revolving credit facility

    —          501        3,000     
 

 

 

   

 

 

   

 

 

   

Total current liabilities

    21,650        27,211        36,960     

Other liabilities

    216        2,891        2,867     

Deferred revenue

    2,089        7,480        6,510     

Accrued severance pay

    1,677        2,372        2,744     
 

 

 

   

 

 

   

 

 

   

TOTAL LIABILITIES

    25,632        39,954        49,081     
 

 

 

   

 

 

   

 

 

   

Commitments and Contingencies (Note 9)

       

Convertible preferred stock, $0.0001 par value—21,566,101 shares authorized as of December 31, 2009 and 2010 and September 30, 2011 (unaudited); 10,761,511 shares issued and outstanding as of December 31, 2009, 2010 and September 30, 2011 (unaudited), aggregate liquidation preference of $83,982 and $88,660 as of December 31, 2010 and September 30, 2011 (unaudited); no shares issued and outstanding, pro forma (unaudited)

    53,442        53,442        53,442        —     
 

 

 

   

 

 

   

 

 

   

STOCKHOLDERS’ EQUITY (DEFICIT):

       

Common stock, $0.0001 par value—50,000,000 shares authorized as of December 31, 2009 and 2010 and September 30, 2011 (unaudited); 4,866,676, 6,143,018 and 6,590,184 shares issued and outstanding as of December 31, 2009 and 2010 and September 30, 2011 (unaudited); 17,351,695 shares issued and outstanding, pro forma (unaudited)

    —          1        1        2   

Additional paid-in capital

    2,250        3,340        5,577        59,241   

Accumulated deficit

    (43,848     (55,861     (64,634     (64,634

Accumulated other comprehensive income (loss)

    113        452        (360     (360
 

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL IMPERVA, INC. STOCKHOLDERS’ EQUITY (DEFICIT)

    (41,485     (52,068     (59,416     (5,751

Noncontrolling interest

    (43     (351     (642     (642
 

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)

    (41,528     (52,419     (60,058   $ (6,393
 

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

  $ 37,546      $ 40,977      $ 42,465     
 

 

 

   

 

 

   

 

 

   

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4


Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except share and per share data)

 

    Years Ended December 31,     Nine Months Ended September 30,  
    2008     2009     2010               2010                          2011             

Net revenue:

          (Unaudited)   

Products and license

  $ 24,298      $ 25,727      $ 34,479      $ 23,532      $ 32,821   

Services

    7,848        13,614        20,903        14,866        22,166   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    32,146        39,341        55,382        38,398        54,987   

Cost of revenue:

         

Products and license

    3,661        4,795        5,905        4,123        4,433   

Services

    3,455        4,576        6,428        4,639        7,062   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    7,116        9,371        12,333        8,762        11,495   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    25,030        29,970        43,049        29,636        43,492   

Operating expenses:

         

Research and development

    8,591        10,538        13,214        9,468        12,858   

Sales and marketing

    20,447        26,920        34,168        24,095        30,970   

General and administrative

    3,608        4,669        7,982        5,292        8,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    32,646        42,127        55,364        38,855        52,014   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (7,616     (12,157     (12,315     (9,219     (8,522

Other income (expense), net

    190        178        474        357        (238
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (7,426     (11,979     (11,841     (8,862     (8,760

Provision for income taxes

    229        360        527        331        471   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (7,655     (12,339     (12,368     (9,193     (9,231

Loss attributable to noncontrolling interest

    —          43        355        256        458   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Imperva, Inc. stockholders

  $ (7,655   $ (12,296   $ (12,013   $ (8,937   $ (8,773
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock attributable to Imperva, Inc. stockholders, basic and diluted

  $ (1.98   $ (2.82   $ (2.46   $ (1.84   $ (1.64
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net loss per share of common stock, basic and diluted

    3,860,033        4,365,359        4,884,665        4,846,160        5,334,581   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share of common stock attributable to Imperva, Inc. stockholders, basic and diluted (unaudited)

      $ (0.77     $ (0.54
     

 

 

     

 

 

 

Shares used in computing pro forma net loss per share of common stock, basic and diluted (unaudited)

        15,646,176          16,096,092   
     

 

 

     

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5


Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(In thousands, except share data)

 

    Convertible
Preferred

Stock
          Common
Stock
    Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interest
    Total
Stockholders’
Equity

(Deficit)
 
    Shares     Amount           Shares     Amount            

Balance as of December 31, 2007

    9,125,542      $ 33,464            4,316,973      $ —        $ 870      $ (23,897   $ —        $ —        $ (23,027

Issuance of common stock upon exercise of stock options

    —          —              275,245        —          218        —          —          —          218   

Vesting of restricted stock

    —          —              —          —          118        —          —          —          118   

Stock-based compensation

    —          —              —          —          274        —          —          —          274   

Issuance of Series D Convertible Preferred Stock

    1,635,969        19,978            —          —          —          —          —          —          —     

Component of other comprehensive income (loss), net of tax:

                     

Change in unrealized gain (loss) on derivatives

    —          —              —          —          —          —          —          —          —     

Net loss.

    —          —              —          —          —          (7,655     —          —          (7,655
                     

 

 

 

Comprehensive loss.

                        (7,655
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2008

    10,761,511        53,442            4,592,218        —          1,480        (31,552     —          —          (30,072

Issuance of common stock upon exercise of stock options

    —          —              274,458        —          231        —          —          —          231   

Vesting of restricted stock

    —          —              —          —          118        —          —          —          118   

Stock-based compensation

    —          —              —          —          421        —          —          —          421   

Component of other comprehensive income (loss), net of tax:

                     

Change in unrealized gain (loss) on derivatives

    —          —              —          —          —          —          113        —          113   

Net loss.

    —          —              —          —          —          (12,296     —          (43     (12,339
                     

 

 

 

Comprehensive loss.

                        (12,226
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2009

    10,761,511        53,442            4,866,676        —          2,250        (43,848     113        (43     (41,528

Issuance of common stock upon exercise of stock options

    —          —              372,523        —          436        —          —          —          437   

Issuance of common stock upon early exercise of stock options

    —          —              60,000        —          —          —          —          —          —     

Issuance of restricted stock

    —          —              843,819        1        —          —          —          —          —     

Vesting of restricted stock

    —          —              —          —          61        —          —          —          61   

Stock-based compensation

    —          —              —          —          640        —          —          —          640   

Purchase of additional ownership interest in Incapsula, Inc.

    —          —              —          —          (47     —          —          47        —     

Components of other comprehensive income (loss), net of tax:

                     

Change in unrealized gain (loss) on investments

    —          —              —          —          —          —          2        —          2   

Change in unrealized gain (loss) on derivatives

    —          —              —          —          —          —          337        —          337   

Net loss.

    —          —              —          —          —          (12,013     —          (355     (12,368
                     

 

 

 

Comprehensive loss.

                        (12,029
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2010

    10,761,511        53,442            6,143,018        1        3,340        (55,861     452        (351     (52,419
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-6


Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)—(Continued)

(In thousands, except share data)

 

    Convertible
Preferred

Stock
          Common
Stock
    Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interest
    Total
Stockholders’
Equity

(Deficit)
 
    Shares     Amount           Shares     Amount            

Balance as of December 31, 2010

    10,761,511      $ 53,442            6,143,018      $ 1      $ 3,340      $ (55,861   $ 452      $ (351   $ (52,419

Issuance of common stock upon exercise of stock options (unaudited)

    —          —              357,166        —          542        —          —          —          542   

Issuance of common stock upon early exercise of stock awards (unaudited)

    —          —              90,000        —          —          —          —          —          —     

Vesting of restricted stock (unaudited)

    —          —              —          —          708        —          —          —          708   

Stock-based compensation (unaudited)

    —          —              —          —          1,154        —          —          —          1,154   

Purchase of additional ownership interest in Incapsula, Inc. (unaudited)

    —          —              —          —          (167     —          —          167        —     

Components of other comprehensive income (loss), net of tax:

                     

Change in unrealized gain (loss) on investments (unaudited)

    —          —              —          —          —          —          (2     —          (2

Change in unrealized gain (loss) on derivatives (unaudited)

    —          —              —          —          —          —          (810     —          (810

Net loss (unaudited).

    —          —              —          —          —          (8,773     —          (458     (9,231
                     

 

 

 

Comprehensive loss (unaudited).

                        (10,043
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2011 (unaudited)

    10,761,511      $ 53,442           
6,590,184
  
  $ 1      $ 5,577      $ (64,634   $ (360   $ (642   $ (60,058
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-7


Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

 

     Years Ended
December 31,
    Nine Months Ended
September 30,
 
       2008         2009         2010           2010             2011      
           (Unaudited)  

CASH FLOWS FROM OPERATING ACTIVITIES:

          

Net loss

   $ (7,655   $ (12,339   $ (12,368   $ (9,193   $ (9,231

Adjustments to reconcile net loss to net cash used in operating activities:

          

Depreciation and amortization

     455        672        1,170        779        1,123   

Stock-based compensation

     274        421        640        316        1,154   

Revaluation of convertible preferred stock warrant liability

     —          —          14        (15     154   

Changes in operating assets and liabilities:

          

Accounts receivable, net

     (2,971     (2,805     (710     2,894        (2,289

Inventory

     (194     (60     204        239        (100

Prepaid expenses and other assets

     (611     624        (668     (265     (159

Accounts payable

     700        854        (568     (224     59   

Accrued compensation and benefits

     938        1,290        1,548        (83     728   

Accrued and other liabilities

     703        1,032        2,021        1,190        (963

Severance pay (net)

     61        (81     59        87        44   

Deferred revenue

     3,014        5,317        7,841        3,375        4,343   

Deferred tax assets

     (16     (181     (28     (53     2   

Other

     138        (255     (204     122        79   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (5,164     (5,511     (1,049     (831     (5,056
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Purchase of short-term investments

     —          (463     (2,249     (2,249     (988

Proceeds from maturities of short-term investments

     —          —          1,467        1,037        2,266   

Purchase of property and equipment

     (1,291     (1,329     (2,889     (2,398     (1,036

Change in restricted cash

     (267     (150     (902     (640     159   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (1,558     (1,942     (4,573     (4,250     401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Proceeds from exercise of stock options

     218        231        588        373        542   

Initial public offering costs paid

     —          —          —          —         
(2,802

Proceeds from issuance of convertible promissory note from related party

     —          600        —          —          —     

Repayment of convertible promissory note from related party

     (40     —          (600     (600     —     

Proceeds from issuance of Series D convertible preferred stock, net of issuance costs

     19,978        —          —          —          —     

Proceeds from issuance of restricted stock

     —          —          2,785        2,785        963   

Borrowings on revolving credit facility

     —          —          501        —          3,000   

Repayments of revolving credit facility

     —          —          —          —          (501
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     20,156        831        3,274        2,558        1,202   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (113     260        171        (214     68   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     13,321        (6,362     (2,177     (2,737     (3,385

CASH AND CASH EQUIVALENTS—Beginning of period

     11,628        24,949        18,587        18,587        16,410   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS—End of period

   $ 24,949      $ 18,587      $ 16,410      $ 15,850      $ 13,025   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

          

Cash paid for interest

   $ —        $ —        $ 12      $ 12      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash paid for income taxes

   $ 164      $ 276      $ 192      $ 79      $ 352   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NONCASH INVESTING AND FINANCING ACTIVITIES:

          

Vesting of restricted stock

   $ 118      $ 118      $ 61      $ 61      $ 708   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-8


Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

1. The Company and Summary of Significant Accounting Policies

Business

Imperva, Inc. (together with its subsidiaries, the “Company”) was incorporated in April 2002 in Delaware. The Company is headquartered in Redwood Shores, California and has subsidiaries located throughout the world including Israel, Asia and Europe. The Company is engaged in the development, marketing, sales, service and support of data security solutions that provide visibility and control over high value business data across critical systems within the data center.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include all adjustments necessary for the fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. The consolidated financial statements include the accounts of Imperva Inc., its wholly-owned subsidiaries and one majority owned subsidiary, Incapsula, Inc. (“Incapsula”). All intercompany accounts and transactions have been eliminated in consolidation.

Noncontrolling Interest

The Company has recorded a noncontrolling interest in its consolidated balance sheets, consolidated statements of operations and consolidated statements of convertible preferred stock and stockholders’ equity (deficit) for the 42%, 24%, and 18% ownership interest of the minority owners of Incapsula as of December 31, 2009 and 2010 and September 30, 2011, respectively. Changes to the ownership interest in Incapsula held by the minority owners are accounted for as equity transactions in the consolidated statements of convertible preferred stock and stockholders’ equity (deficit) as the Company obtained control of Incapsula on November 5, 2009.

Subsequent Events

The Company assesses the appropriate accounting for and disclosure of events that occur after the balance sheet date but before the consolidated financial statements are issued. For the consolidated financial statements as of December 31, 2010 and the year then ended, the Company evaluated subsequent events through June 17, 2011, the date these consolidated financial statements were issued.

Use of Estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such management estimates include the fair value of accounts receivable, inventory, derivative instruments, common stock and convertible preferred stock warrants and assumptions used in the calculation of income taxes and stock-based compensation, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts such estimates and assumptions when facts

 

F-9


Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

Unaudited Interim Financial Information

The accompanying interim consolidated balance sheet as of September 30, 2011, the interim consolidated statements of operations and cash flows for the nine months ended September 30, 2010 and 2011 and the interim consolidated statements of convertible preferred stock and stockholders’ equity (deficit) for the nine months ended September 30, 2011 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the consolidated balance sheet as of September 30, 2011 and the consolidated results of operations, and cash flows for the nine months ended September 30, 2010 and 2011 and convertible preferred stock and stockholders’ equity (deficit) for the nine months ended September 30, 2011. The consolidated financial data disclosed in these notes to the consolidated financial statements related to the nine months ended September 30, 2010 and 2011 are also unaudited. The consolidated results of operations during the nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2011 or for any other future annual or interim period.

Unaudited Pro Forma Stockholders’ Equity

In June 2011, the board of directors of the Company authorized management to file a registration statement with the Securities and Exchange Commission (“SEC”) for the Company to sell shares of common stock to the public. If the contemplated offering is completed, all 10,761,511 shares of convertible preferred stock would convert into 10,761,511 shares of common stock based on the shares of convertible preferred stock outstanding as of September 30, 2011. In addition, the convertible preferred stock warrants would convert into common stock warrants and the convertible preferred stock warrant liability would be reclassified to additional paid-in capital. The unaudited pro forma stockholders’ equity as of September 30, 2011 gives effect to the automatic conversion of all outstanding shares of the Company’s convertible preferred stock into shares of common stock and the reclassification of the convertible preferred stock warrant liability to additional paid-in-capital.

Concentration of Supply Risk

The Company relies on a third party to manufacture its hardware appliances, and purchases its hardware appliances through such third party’s value-added resellers. Quality or performance failures of the Company’s products or changes in the Company’s suppliers’ financial or business condition could disrupt the Company’s ability to supply quality products to its customers and thereby have a material adverse effect on its business and consolidated financial statements.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, cash equivalents, short-term investments, restricted cash and derivative financial instruments. The Company’s cash, cash equivalents, short-term investments and restricted cash are

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

invested in high-quality instruments with banks and financial institutions located in the United States and Israel. Such deposits may be in excess of insured limits provided on such deposits.

The Company uses derivative financial instruments to manage exposures to foreign currency risks. The Company’s derivatives expose it to credit risk to the extent that the counterparty may be unable to meet the terms of the agreement. The Company seeks to mitigate such risk by limiting its counterparties to those with high or investment-grade credit ratings. The Company does not require collateral under these agreements and has not historically experienced any losses due to credit risk or lack of performance by counterparties.

Derivative Financial Instruments

The Company uses forward foreign exchange contracts to reduce its exposure to foreign currency rate changes for operating expenses that are forecasted to be incurred in currencies other than U.S. dollars. The Company records all of its derivative instruments at their gross fair value on the consolidated balance sheet at each balance sheet date.

The accounting for changes in the fair value of a derivative instrument depends on whether the instrument has been designated and qualifies as a cash flow hedge for accounting purposes. For forward foreign exchange contracts that are designated and qualify as cash flow hedges, the effective portion of the gain or loss resulting from changes in the fair value of the derivative instruments is accounted for in accumulated other comprehensive income (loss) (“AOCI”) in the consolidated statements of convertible preferred stock and stockholders’ equity (deficit) and reclassified into operating expenses in the consolidated statements of operations in the period or periods during which the hedged transaction affects earnings. As of December 31, 2010, the Company estimated that $564,000 of net derivative gains included in accumulated other comprehensive income will be reclassified into earnings within the next 12 months. The ineffective portion of the gain or loss resulting from the change in fair value is recognized in other income (expense), net in the consolidated statements of operations.

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash on hand, highly liquid investments in money market funds and various deposit accounts.

The Company considers all high quality investments purchased with original maturities at the date of purchase greater than three months and remaining maturities of less than one year from the balance sheet date to be short-term investments. Cash equivalents and short-term investments are classified as available-for-sale and are, therefore, recorded at fair value on the consolidated balance sheets, with any unrealized gains and losses reported in the consolidated statements of convertible preferred stock and stockholders’ equity (deficit) as a component of accumulated other comprehensive income (loss) until realized. The Company uses the specific-identification method to compute gains and losses on the investments. The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included as a component of other income (expense), net in the consolidated statements of operations. Realized gains and losses and declines in value that are considered to be other than temporary are also recognized as a component of other income (expense), net in the consolidated statements of operations.

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

Restricted Cash

The Company has restricted cash pledged as collateral representing a security deposit required for a facility lease, collateral for the Company’s contract manufacturer in regards to the Company’s obligation to purchase inventory, collateral for the Company’s subsidiary’s forward foreign exchange contracts and a corporate credit card facility. As of December 31, 2009, 2010 and September 30, 2011, the Company has classified $100,000, $996,000, and $688,000, respectively, of restricted cash as a current asset relating to inventory purchase commitments, collateral for the Company’s subsidiary’s forward foreign exchange contracts and the corporate credit card facility. In addition, as of December 31, 2009, 2010, and September 30, 2011, the Company has classified $512,000, $518,000, and $667,000, respectively, as non-current assets relating to its facility lease arrangement.

Inventory

Inventory consists of finished goods hardware appliances and related component parts and is stated at the lower of cost or market value determined on an average cost basis. Inventory that is obsolete or in excess of forecasted demand is written down to its estimated realizable value. Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory. The Company incurred an inventory write down of $59,000, $396,000 and $396,000 for the years ended December 31, 2009 and 2010, and the nine months ended September 30, 2010, respectively. There were no inventory write downs for the year ended December 31, 2008 and the nine months ended September 30, 2011.

Property and Equipment

Property and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally two to seven years.

Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the assets. Upon the retirement or disposition of property and equipment, the related costs and accumulated depreciation is removed and any related gain or loss is recorded in the consolidated statements of operations. Repairs and maintenance that do not extend the life or improve an asset are expensed in the periods incurred.

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets, which consist of property and equipment, for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists if the carrying amounts of such assets exceed the estimates of future net undiscounted cash flows expected to be generated by such assets. Should impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s estimated fair value. As of December 31, 2009 and 2010 and September 30, 2011, the Company has not written down any of its long-lived assets as a result of impairment.

Revenue Recognition

The Company derives revenue from two sources: (i) products and license revenue, which includes hardware and perpetual software license revenue and (ii) services revenue, which includes

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

maintenance and support, professional services, training and subscription arrangements. Substantially all of product and license sales have been sold in combination with maintenance and support services. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery or performance has occurred; the sales price is fixed or determinable; and collection is reasonably assured.

The Company defines each of the four criteria above as follows:

 

  Ÿ  

Persuasive evidence of an arrangement exists.     Evidence of an arrangement consists of a purchase order issued pursuant to the terms and conditions of a distributor or value-added reseller agreement and, in limited cases, an end user agreement and/or purchase order.

 

  Ÿ  

Delivery or performance has occurred.     The Company uses shipping and related documents, or written evidence of customer acceptance, when applicable, to verify delivery or performance. The Company recognizes product revenue upon transfer of title and risk of loss, which primarily is upon shipment to value-added resellers, distributors or end users. The Company does not have significant obligations for future performance, such as customer acceptance provisions, rights of return or pricing credits, associated with its sales.

 

  Ÿ  

The sales price is fixed or determinable.     The Company assesses whether the sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment. Standard payment terms to customers range from 30 to 90 days. In the event payment terms are provided that differ from the Company’s standard business practices, the fees are deemed to not be fixed or determinable and revenue is recognized when the payments become due, provided the remaining criteria for revenue recognition have been met.

 

  Ÿ  

Collection is reasonably assured.     The Company assesses probability of collection on a customer-by-customer basis. The Company’s customers are subjected to a credit review process that evaluates their financial condition and ability to pay for products and services. If the Company concludes that collection is not reasonably assured based upon an initial review, the Company does not recognize revenue until payment is received.

Maintenance and support and subscription revenue includes arrangements for software maintenance and technical support for the Company’s products and subscription services revenue primarily related to the Company’s cloud-based services. The terms of the Company’s subscription service arrangements do not provide customers the right to take possession of the related software. Maintenance and support is offered under renewable, fee-based contracts, which include technical support, hardware repair and replacement parts, bug fixes, patches and unspecified upgrades on a when-and-if-available basis. Maintenance and support and subscription revenue is initially deferred and recognized ratably over the life of the contract, with the related expenses recognized as incurred. Maintenance and support and subscription contracts usually have a term of one to three years. Unearned maintenance and support and subscription revenue is included in deferred revenue.

Professional service revenue primarily consists of the fees the Company earns related to installation and consulting services. The Company recognizes revenue from professional services upon delivery or completion of performance. Professional service arrangements are typically short term in nature and are largely completed within 90 days from the start of service.

Training services are recognized upon delivery of the training.

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

Multiple Element Arrangements

In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for revenue recognition to remove from the scope of industry-specific software revenue recognition guidance any tangible products containing software components and non-software components that operate together to deliver the product’s essential functionality. In addition, the FASB amended the accounting standards for multiple element revenue arrangements not within the scope of industry-specific software revenue recognition guidance to:

 

  Ÿ  

Provide updated guidance on whether multiple elements exist, how the elements in an arrangement should be separated, and how the arrangement consideration should be allocated to the separate elements;

 

  Ÿ  

Implement a price hierarchy, where the selling price for an element is based on vendor-specific objective evidence (“VSOE”), if available; third-party evidence (“TPE”), if available and VSOE is not available; or the best estimate of selling price (“BESP”), if neither VSOE or TPE is available; and

 

  Ÿ  

Eliminate the use of the residual method and require an entity to allocate arrangement consideration using the relative selling price method.

The Company adopted this accounting guidance at the beginning of the first quarter of 2010 on a prospective basis for applicable transactions originating or materially modified after December 31, 2009. As a result of the adoption, net revenue for the year ended December 31, 2010, was approximately $1.5 million higher than the net revenue that would have been recorded under the previous accounting rules. Net loss and net loss per share of common stock for the year ended December 31, 2010, were approximately $1.3 million and $0.28 lower than the net loss and net loss per share of common stock that would have been recorded under the previous accounting rules. In terms of the timing and pattern of revenue recognition, the amended accounting guidance is not expected to have a significant effect on net revenue in periods after the initial adoption.

This guidance does not change the units of accounting for the Company’s revenue transactions. The Company’s non-software products and services qualify as separate units of accounting because they have value to the customer on a stand-alone basis and the Company’s revenue arrangements do not include a general right of return for delivered products.

Most of the Company’s products are hardware appliances containing software components that function together to provide the essential functionality of the product. Therefore, the Company’s hardware appliances are considered non-software deliverables and have been removed from the industry-specific software revenue recognition guidance.

The Company’s product revenue also includes revenue from the sale of stand-alone software products. Stand-alone software may operate on the Company’s hardware appliance, but is not considered essential to the functionality of the hardware and continues to be subject to the industry-specific software revenue recognition guidance, which remains unchanged.

Certain of the Company’s stand-alone software when sold with hardware appliances is considered essential to its functionality and as a result is no longer accounted for under industry-specific software revenue recognition guidance; however, this same software when sold separately is

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

accounted for under the industry-specific software revenue recognition guidance. Additionally, the Company provides unspecified software upgrades for its products, on a when-and-if available basis, and hardware replacements through maintenance and support contracts. These support arrangements when sold on a stand-alone basis would continue to be subject to the industry specific software revenue recognition guidance.

For stand-alone software sales after December 31, 2009 and for all transactions entered into prior to the first quarter of 2010, the Company recognizes revenue based on software revenue recognition guidance. Under the software revenue recognition guidance, the Company uses the residual method to recognize revenue when a product agreement includes one or more elements to be delivered at a future date and VSOE of the fair value of all undelivered elements exists. In the majority of the Company’s contracts, the only element that remains undelivered at the time of delivery of the product is maintenance and support services. Under the residual method, the VSOE of fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized as product revenue. If evidence of the VSOE of fair value of one or more undelivered elements does not exist, all revenue is generally deferred and recognized when delivery of those elements occurs or when fair value can be established.

For all other transactions originating or materially modified after December 31, 2009, the Company recognizes revenue in accordance with the amended accounting guidance. For certain arrangements with multiple deliverables, the Company allocates the arrangement fee to the non-software element based upon the relative selling price of such element and, if software and software-related elements (e.g., maintenance and support for the software element) are also included in the arrangement, the Company allocates the arrangement fee to each of those software and software-related elements as a group. After such allocations are made, the amount of the arrangement fee allocated to the software and software-related elements is accounted for using the residual method. When applying the relative selling price method, the Company determines the selling price for each element using VSOE of selling price, if it exists, or if not, TPE of selling price, if it exists. If neither VSOE nor TPE of selling price exist for an element, the Company uses its BESP for that element. The revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for that element. The Company limits the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services, or subject to our future performance obligation.

Consistent with the Company’s methodology under previous accounting guidance, VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for a service fall within a reasonably narrow pricing range, evidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range of the median rates. In addition, the Company considers major service groups and geographies in determining VSOE.

The Company is typically not able to determine TPE for its products or services. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy differs from that of its peers and its offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis.

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

When the Company is unable to establish the selling price of its non-software deliverables using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company determines BESP for the purposes of allocating the arrangement by reviewing external and internal market factors including, but not limited to, pricing practices including discounting, the geographies in which the Company offers its products and services, the type of customer (i.e., distributor, value added reseller or direct end user) and competition. Additionally, the Company considers historical transactions, including transactions whereby the deliverable was sold on a stand-alone basis. The determination of BESP is made through consultation with and approval by the Company’s management. Selling prices are analyzed on a quarterly basis to identify if the Company has experienced significant changes in its selling prices.

For its non-software deliverables the Company allocates the arrangement consideration based on the relative selling price of the deliverables. For its hardware appliances the Company uses BESP as its selling price. For its maintenance and support, professional services and training, the Company primarily uses VSOE as the selling price and when the Company is unable to establish a selling price using VSOE, it uses BESP.

Deferred Revenue

Deferred revenue represents amounts invoiced to customers for which the related revenue has not been recognized because one or more of the revenue recognition criteria have not been met. The current portion of the deferred revenues represents the amount that is expected to be recognized as revenue within one year of the consolidated balance sheet date.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at invoiced amounts, net of allowances for doubtful accounts if applicable, and do not bear interest.

The Company generally does not require collateral from its customers; however, in certain circumstances, may require letters of credit, other collateral, additional guarantees or advance payments. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of its customer accounts. The Company regularly reviews its accounts receivable that remain outstanding past their applicable payment terms and establishes allowance and potential write-offs by considering certain factors such as historical experience, industry data, credit quality, age of balances and current economic conditions that may affect a customers’ ability to pay.

Concentration of Revenue and Accounts Receivable

Significant customers are those which represent more than 10% of the Company’s total revenue or gross accounts receivable balance at each respective balance sheet date. For the years ended December 31, 2008, 2009 and 2010 and the nine months ended September 30, 2011, the Company did not have any customers that represented more than 10% of the Company’s total revenue. For the nine months ended September 30, 2010, one customer accounted for 10% of net revenue. As of December 31, 2010, one customer represented 15% of gross accounts receivable. There were no customers who represented greater than 10% of gross accounts receivable as of December 31, 2009 and September 30, 2011.

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

Shipping and Handling Costs

Costs related to shipping and handling are included in cost of revenue.

Research and Development Costs

Research and development costs, including direct and allocated expenses, are expensed as incurred.

Software Development Costs

The costs to develop software have not been capitalized as the Company believes that the technological feasibility of the related software is not established until substantially all product development is complete.

Warranty Costs

The Company generally provides a 60-day warranty on hardware appliance products and software from the date of shipment to customers. To date, cost to repair or replace items sold to customers has been insignificant.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising expense is included within sales and marketing expense in the consolidated statements of operations. For the years ended December 31, 2008, 2009 and 2010 and the nine months ended September 30, 2010 and 2011, advertising expenses were insignificant.

Deferred Offering Costs

Deferred offering costs, consisting of legal, accounting and filing fees relating to the initial public offering, are capitalized. The deferred offering costs will be offset against initial public offering proceeds upon the effectiveness of the offering. In the event the offering is terminated, deferred offering costs will be expensed. As of September 30, 2011, the Company had capitalized $3.9 million of deferred offering costs in other assets on the consolidated balance sheets. No amounts were deferred as of December 31, 2009 and 2010.

Retirement Savings Plan

The Company maintains a defined contribution 401(k) retirement savings plan for its U.S. employees. Each participant in the 401(k) retirement savings plan may elect to contribute a percentage of his or her annual compensation up to a specified maximum amount allowed under U.S. Internal Revenue Service regulations. There were no employer contributions to the 401(k) retirement savings plan for the years ended December 31, 2008, 2009 and 2010 and the nine months ended September 30, 2010 and 2011.

Severance Pay Asset and Liability

The Company has recorded a severance pay asset and liability on its consolidated balance sheets related to its employees located in Israel. The Company’s liability for severance pay is

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

calculated pursuant to Israeli severance pay law based on the most recent salary for the employees multiplied by the number of years of employment, as of the respective balance sheet date. Employees are entitled to one month salary for each year of employment or a portion thereof. The Company’s liability at each respective balance sheet date for all of its Israeli employees is fully accrued in the accompanying consolidated financial statements and is mainly funded through monthly deposits to the employee’s pension and management insurance policies. The carrying value of these policies is recorded as a severance fund asset in the Company’s consolidated balance sheets.

The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law. The carrying value of the deposited funds is based on the cash surrender value of these policies and includes profits accumulated through the respective balance sheet date. The Company recognized severance expense related to the Israeli severance pay law during the years ended December 31, 2008, 2009 and 2010 and the nine months ended September 30, 2010 and 2011 of $583,000, $550,000, $794,000, $614,000 and $733,000, respectively.

Income Taxes

The Company accounts for income taxes in accordance with the FASB ASC No. 740 (“ASC 740”), Accounting for Income Taxes. The Company makes certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, tax benefits and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to our tax provision in the subsequent period when such a change in estimate occurs.

The Company uses an asset and liability approach for accounting for deferred income taxes, which requires recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements, but have not been reflected in its taxable income. Estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred income tax assets, which arise from temporary differences and carryforwards. Deferred income tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled. The Company regularly assesses the likelihood that its deferred income tax assets will be realized from recoverable income taxes or recovered from future taxable income based on the realization criteria set forth in ASC 740. To the extent that the Company believes any amounts are more likely not to be realized, the Company records a valuation allowance to reduce the deferred income tax assets. In the event the Company determines that all or part of the net deferred tax assets are not realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. Similarly, if the Company subsequently realizes deferred income tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in an adjustment to earnings in the period such determination is made.

In addition, the calculation of the Company’s tax liabilities involves addressing uncertainties in the application of complex tax regulations. The Company recognizes and measures potential liabilities

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

based upon criteria set forth in ASC 740. Based upon these criteria, the Company estimates whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities may result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. If the Company’s estimate of tax liabilities is less than the amount ultimately assessed, a further charge to expense would result.

Significant judgment is required in determining any valuation allowance recorded against deferred income tax assets. In assessing the need for a valuation allowance, the Company considers all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that the Company changes its determination as to the amount of deferred income tax assets that could be realized, it will adjust its valuation allowance with a corresponding effect to the provision for income taxes in the period in which such determination is made.

Significant judgment is also required in evaluating the Company’s uncertain tax positions under ASC 740 and determining its provision for income taxes. Although the Company believes its reserves for uncertain tax positions are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the Company’s historical income tax provisions and accruals. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserves for uncertain tax positions and any changes to the reserves that are considered appropriate, as well as the related net interest and penalties, if applicable.

Liability Associated with Warrants to Purchase Convertible Preferred Stock

The Company accounts for freestanding warrants to purchase shares of convertible preferred stock that are contingently redeemable as liabilities on the consolidated balance sheet at their estimated fair value because the warrants may obligate the Company to redeem these warrants at some point in the future. At the end of each reporting period, changes in the estimated fair value of the warrants to purchase shares of the convertible preferred stock are recorded through other income (expense), net in the consolidated statements of operations. The Company will continue to adjust the liability associated with the warrants to purchase convertible preferred stock for changes in the estimated fair value of the warrants until the earlier of the exercise of the warrants or the completion of a liquidation event, including the completion of an initial public offering, at which time the convertible preferred stock issuable upon exercise of the warrants will become common stock and the related liability will be reclassified to stockholders’ equity.

Stock-Based Compensation

Compensation costs related to employee stock option grants are based on the fair value of the options on the date of grant, net of estimated forfeitures. The Company determines the grant date fair value of the options using the Black-Scholes option-pricing model and the related stock-based compensation expense is generally recognized on a straight-line basis over the period in which an employee is required to provide service in exchange for the options, or the vesting period of the respective options.

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

Foreign Currency

The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. Transactions denominated in currencies other than the functional currency are remeasured to the functional currency at the average exchange rate in effect during the period. At the end of each reporting period, monetary assets and liabilities are remeasured to the functional currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Gains and losses related to remeasurement are recorded in other income (expense) in the consolidated statements of operations.

Comprehensive Income (Loss)

Comprehensive income (loss) is presented in the consolidated statements of convertible preferred stock and stockholders’ equity (deficit). Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss). For the Company, other comprehensive income (loss) consists of changes in unrealized gains and losses on the Company’s available-for-sale securities and unrealized gains and losses on the Company’s derivative instruments designated as hedges for accounting purposes.

Fair Value of Financial Instruments

The Company measures and reports its cash equivalents, short-term investments, derivative instruments, the Israeli severance pay fund assets, and the liability associated with the warrants to purchase convertible preferred stock at fair value. Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

Level I—Unadjusted quoted prices in active markets for identical assets or liabilities;

Level II—Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level III—Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The Company’s financial instruments consist of Level I and Level II assets and Level III liabilities. Level I securities include highly liquid money market funds. Level II instruments include deposits maintained with financial institutions and derivative instruments. Level III liabilities that are measured at fair value on a recurring basis consist of preferred stock warrant liabilities. The fair values of the outstanding convertible preferred stock warrants are measured using the Black-Scholes option-pricing model. Inputs used to determine estimated fair value include the estimated fair value of the underlying

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

stock at the valuation measurement date, the remaining contractual term of the warrants, risk-free interest rates, expected dividends and the expected volatility of the underlying stock.

Net Loss per Share of Common Stock

The Company’s basic net loss per share of common stock is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The weighted-average number of shares of common stock used to calculate the Company’s basic net loss per share of common stock excludes those shares subject to repurchase as these shares are not deemed to be issued for accounting purposes until they vest. The diluted net loss per share of common stock is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, convertible preferred stock, stock options to purchase common stock, common stock subject to repurchase, warrants to purchase convertible preferred stock and warrants to purchase common stock are considered to be common stock equivalents. Basic and diluted net loss per share of common stock was the same for each period presented as the inclusion of all potential common shares outstanding was anti-dilutive.

Unaudited Pro Forma Net Loss per Share of Common Stock

In contemplation of the Company’s initial public offering, the Company has presented the unaudited pro forma basic and diluted net loss per share of common stock which has been computed to give effect to the automatic conversion of the convertible preferred stock into shares of common stock on a weighted-average basis. Also, the numerator in the pro forma basic and diluted net loss per common share calculation has been adjusted to remove gains and losses resulting from the remeasurement of the warrant liability to fair value as if the conversion had occurred as of the beginning of the period.

Segment Information

Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer.

The Company has two operating segments which are both reportable business segments: (i) Imperva, which is comprised of Imperva’s and its wholly-owned subsidiaries’ financial position and results of operations; and (ii) Incapsula, which is comprised of Incapsula’s financial position and results from operations. The Company operated as one reporting segment until its investment in Incapsula in November 2009.

Recent Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures . ASU 2010-06 requires disclosures about inputs and valuation techniques used to

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

measure fair value as well as disclosures about significant transfers, beginning in the first quarter of 2010. Additionally, these amended standards require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level III), beginning in the first quarter of 2011. The adoption of this new standard did not have a significant impact on the Company’s consolidated financial statements.

Reverse Stock Split

In September 2011, the Company’s board of directors approved an amended and restated certificate of incorporation effecting a 1-for-2 reverse stock split of the Company’s issued and outstanding shares of common stock and convertible preferred stock. The par value of the common and convertible preferred stock will not be adjusted as a result of the reverse stock split. All issued and outstanding common stock, convertible preferred stock, warrants for preferred stock, and per share amounts contained in the Company’s consolidated financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented. The reverse stock split will be effected prior to the effectiveness of a registration statement relating to the initial public offering of the Company’s common stock.

2. Incapsula

On November 5, 2009, the Company entered into a license agreement for Incapsula to use certain developed technology of the Company. In lieu of any other fee or royalty under the license agreement, Incapsula issued to the Company 5,000,000 shares of its Series A Convertible Preferred Stock representing a 58% ownership interest at the date of issuance. The transaction was accounted for as a business combination. No value was assigned to the license on the acquisition date as the use of the license will stay within the control of the Company. Therefore, the Company’s historical carrying value of the developed technology immediately prior to the acquisition was used to determine the value of the purchase consideration exchanged in the transaction. As Incapsula was a newly-formed entity with no net assets on the acquisition date and the value of the license was determined to be zero, no goodwill was recorded by the Company on the acquisition.

Under the terms of the agreements between the Company and Incapsula, the Company has the right, but not the obligation, to purchase the remaining ownership interest in Incapsula commencing on November 5, 2013 and ending on November 5, 2018 (the “Purchase Right”). Exercise of the Purchase Right is solely within the Company’s control and the price for the remaining ownership interest will be based on an Incapsula enterprise valuation calculated as the greater of (i) eight times Incapsula’s prior 12 months trailing revenues or (ii) seven times the aggregate amount Incapsula has raised in connection with its Series A Convertible Preferred Stock financings. On the acquisition date, no value was assigned to this Purchase Right as the option does not meet the definition of a derivative instrument as it does not contain a net settlement feature. Specifically, the Purchase Right can only be gross physically settled as Incapsula is a non-publicly traded company whose stock is not readily convertible to cash.

On March 9, 2010, the Company entered into a Series A and Series A-1 Purchase Agreement whereby Incapsula issued 6,666,666 shares of its Series A Convertible Preferred Stock to the Company in exchange for cash consideration of $3.0 million. As a result of this transaction, the

 

F-22


Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

Company increased its ownership interest in Incapsula to 76% at the date of issuance. The purchase of the additional ownership interest in Incapsula was treated as an equity transaction.

Under the terms of the Series A and Series A-1 Purchase Agreement, the Company entered into a forward contract with Incapsula to purchase 8,750,000 shares of Incapsula’s Series A-1 Convertible Preferred Stock in exchange for $7.0 million in cash consideration if certain milestones are achieved no later than September 2011. The Company will have the obligation to purchase the shares from Incapsula when the milestones are achieved. If the milestones are achieved, the purchase of the additional ownership interest in Incapsula will be treated by the Company as an equity transaction. On the transaction date, no value was assigned to the forward contract as the option does not meet the definition of a derivative instrument as it does not contain a net settlement feature. Specifically, the forward contract can only be gross physically settled as Incapsula is a non-publicly traded company whose stock is not readily convertible to cash. As of December 31, 2010, the Company had not recorded a liability in the consolidated balance sheets for its obligation to purchase the shares as Incapsula had not achieved the respective milestones. See Note 18, Subsequent Events.

As of December 31, 2009 and 2010 and September 30, 2011, all of the outstanding shares of Incapsula’s Series A and A-1 Convertible Preferred Stock are held by the Company.

In March 2010, the board of directors of Incapsula adopted the Incapsula 2010 Share Incentive Plan pursuant to which Incapsula may grant to its employees options to purchase shares of Incapsula’s common stock or restricted shares. If the Company exercises the Purchase Right option discussed above, awards under the Incapsula 2010 Share Incentive Plan would be assumed by the Company, substituted with Company stock options or cashed out, and all outstanding awards and the Incapsula 2010 Share Plan would terminate.

3. Cash, Cash Equivalents and Short-Term Investments

Cash, cash equivalents and short-term investments consist of the following (in thousands):

 

     As of December 31, 2009  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Cash and cash equivalents—Bank deposits

   $ 18,587       $  —         $  —         $ 18,587   
  

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments-Mutual funds

   $ 463       $ —         $ —         $ 463   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2010  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Cash and cash equivalents—Bank deposits

   $ 16,410       $  —         $  —         $ 16,410   
  

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments:

           

Mutual funds

   $ 354       $ 2       $ —         $ 356   

Time deposits

     889         —           —           889   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,243       $ 2       $ —         $ 1,245   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

     As of September 30, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Cash and cash equivalents—Bank deposits

   $ 13,025       $  —         $  —         $ 13,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

4. Fair Value of Financial Instruments

The Company measures and reports its cash equivalents, short-term investments, derivative instruments, and convertible preferred stock warrant liability at fair value. The following table sets forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy (in thousands):

 

     As of December 31, 2009  
     Level I      Level II      Level III      Fair Value  

Financial Assets

           

Cash and cash equivalents—Bank deposits

   $ 18,587       $ —         $  —         $ 18,587   

Short-term investments—Mutual funds

     463         —           —           463   

Prepaid expenses and other current assets—Forward foreign exchange contracts

     —           175         —           175   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 19,050       $ 175       $ —         $ 19,225   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liability

           

Convertible preferred stock warrant liability

   $ —         $ —         $ 55       $ 55   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2010  
     Level I      Level II      Level III      Fair Value  

Financial Assets

           

Cash and cash equivalents—Bank deposits

   $ 16,410       $ —         $  —         $ 16,410   

Short-term investments:

           

Mutual funds

     356         —           —           356   

Time deposits

     —           889         —           889   

Prepaid expenses and other current assets—Forward foreign exchange contracts

     —           729         —           729   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 16,766       $ 1,618       $ —         $ 18,384   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liability

           

Convertible preferred stock warrant liability

   $ —         $ —         $ 69       $ 69   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

     As of September 30, 2011  
     Level I      Level II      Level III      Fair Value  

Financial Assets

           

Cash and cash equivalents—Bank deposits

   $ 13,025       $ —         $  —         $ 13,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities

           

Convertible preferred stock warrant liability

   $ —         $ —         $ 223       $ 223   

Accrued and other current liabilities—Forward foreign exchange contracts

     —           360         —           360   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 360       $ 223       $ 583   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition to the amounts disclosed in the above table, the fair value of the Company’s Israeli severance pay assets, which were comprised of Level II assets, was $1.6 million, $2.2 million, and $2.5 million as of December 31, 2009 and 2010 and September 30, 2011, respectively.

The following table sets forth a summary of the changes in the fair value of the Company’s Level III financial liabilities (in thousands):

 

     Years Ended December 31,      Nine Months Ended
September  30,
 
         2008          2009          2010          2010         2011    
            (Unaudited)  

Fair value—beginning of period

   $ 55       $ 55       $ 55       $ 55      $ 69   

Change in fair value of Level III liabilities

     —           —           14         (15     154   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Fair value—end of period

   $ 55       $ 55       $ 69       $ 40      $ 223   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

5. Derivative Instruments

The Company’s primary objective for holding derivative instruments is to reduce its exposure to foreign currency rate changes. The Company reduces its exposure by entering into forward foreign exchange contracts with respect to operating expenses that are forecast to be incurred in currencies other than U.S. dollars. Substantially all of the Company’s revenue and capital purchasing activities and a majority of its operating expenditures are transacted in U.S. dollars. However, certain operating expenditures are incurred in or exposed to other currencies, primarily the Israeli shekel.

The Company has established forecasted transaction currency risk management programs to protect against fluctuations in fair value and the volatility of future cash flows caused by changes in exchange rates. The Company’s currency risk management program includes forward foreign exchange contracts designated as cash flow hedges. These forward foreign exchange contracts generally mature within 12 months.

 

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

Derivative instruments measured at fair value and their classification on the consolidated balance sheets are presented in the following tables (in thousands):

 

     Asset/(Liability) as of
December 31,
     Asset/(Liability) as of
September 30,
 
     2009      2010      2011  
                   (unaudited)  
     Notional
Amount
     Fair Value      Notional
Amount
     Fair Value      Notional
Amount
     Fair Value  

Forward foreign exchange contracts included in prepaid expenses and other current assets/(Accrued and other current liabilities)

   $ 16,380       $ 175       $ 8,355       $ 729       $ 23,179       $ (360

Gains (losses) on derivative instruments accounted for as hedges and their classification on the consolidated statement of operations, are presented in the following tables (in thousands):

 

      Gains/(Losses)
Recognized in OCI -
Effective Portion
    Gains/(Losses)
Reclassified
from AOCI into
Net Loss - Effective Portion
    Gains/(Losses)
Recognized – Ineffective
Portion and Amount
Excluded from
Effectiveness Testing
 
    Year 
Ended
Dec. 31,
2009
    Year
Ended
De
c. 31,
2010
    Nine
Months
Ended
Sept.  30,
2011
    Year
Ended
Dec. 31,
2009 
    Year
Ended
Dec. 31,
2010(a)
    Nine
Months
Ended
Sept.  30,
2011(b)
    Location     Year
Ended
Dec. 31,
2009
    Year
Ended
Dec. 31,
2010
    Nine
Months
Ended
Sept. 30,
2011
 

Cash flow hedges:

                   

Forward foreign exchange contracts

  $ 151      $ 518      $ (138   $ —        $ 105      $ 674       
 
Other income
and expense
  
  
  $ 24      $ 315      $ 49   

 

(a) Includes gains/(losses) reclassified from AOCI into net loss for the effective portion of cash flow hedges, of which $10 and $95 were recognized within cost of sales and operating expenses, respectively, within the consolidated statement of operations for the year ended December 31, 2010.
(b) Includes gains/(losses) reclassified from AOCI into net loss for the effective portion of cash flow hedges, of which $53 and $621 were recognized within cost of sales and operating expenses, respectively, within the consolidated statement of operations for the nine months ended September 30, 2011.

 

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

6. Consolidated Balance Sheet Components

Accounts Receivable Allowance for Doubtful Accounts

The allowance for doubtful accounts is comprised of the following activity (in thousands):

 

     Years Ended December 31,     Nine Months
Ended September 30,

2011
 
         2008              2009             2010        
           (Unaudited)  

Allowance for doubtful accounts, beginning balance

   $ 19       $ 398      $ 368      $ 407   

Charged to costs and expenses

     379         —          58        107   

Recoveries

     —           (30     —          (29

Deductions (write-offs)

     —           —          (19     (347
  

 

 

    

 

 

   

 

 

   

 

 

 

Allowance for doubtful accounts, ending balance

   $ 398       $ 368      $ 407      $ 138   
  

 

 

    

 

 

   

 

 

   

 

 

 

Prepaid and Other Current Assets

Prepaid and other current assets consist of the following (in thousands):

 

     As of December 31,      As of September  30,
2011
 
         2009              2010         
                   (Unaudited)  

Prepaid expenses

   $ 334       $ 714       $ 851   

Derivative asset

     175         729         —     

Deferred cost of revenue

     65         126         81   

Other

     24         140         369   
  

 

 

    

 

 

    

 

 

 

Total prepaid and other current assets

   $ 598       $ 1,709       $ 1,301   
  

 

 

    

 

 

    

 

 

 

Property and Equipment

Property and equipment consist of the following (in thousands):

 

     As of December 31,     As of September  30,
2011
 
     2009     2010    
                 (Unaudited)  

Computers and related equipment

   $ 3,913      $ 5,185      $ 5,137   

Office furniture and equipment

     734        983        966   

Leasehold improvements

     361        1,659        1,765   
  

 

 

   

 

 

   

 

 

 

Total property and equipment

   $ 5,008      $ 7,827      $ 7,868   

Less accumulated depreciation and amortization

     (2,630     (3,726     (3,855
  

 

 

   

 

 

   

 

 

 

Total property and equipment, net

   $ 2,378      $ 4,101      $ 4,013   
  

 

 

   

 

 

   

 

 

 

 

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

Accrued Compensation and Benefits

Accrued compensation and benefits consist of the following (in thousands):

 

     As of December 31,      As of September  30,
2011
 
         2009              2010         
                   (Unaudited)  

Salary and related benefits

   $ 1,708       $ 2,167       $ 2,105   

Accrued vacation

     1,538         2,190         2,658   

Accrued incentive payments

     1,074         1,511         1,833   
  

 

 

    

 

 

    

 

 

 

Total accrued compensation and benefits

   $ 4,320       $ 5,868       $ 6,596   
  

 

 

    

 

 

    

 

 

 

Accrued and Other Current Liabilities

Accrued and other current liabilities consist of the following (in thousands):

 

     As of December 31,      As of September  30,
2011
 
         2009              2010         
                   (Unaudited)  

Accrued expenses

   $ 1,652       $ 2,074       $ 1,775   

Income tax payable

     243         662         906   

Advances from customers

     296         658         187   

Short-term deferred rent

     54         161         193   

Short-term stock repurchase liability

     59         783         990   

Derivative liability

     —           —           360   

Other

     —           181         —     
  

 

 

    

 

 

    

 

 

 

Total accrued and other current liabilities

   $ 2,304       $ 4,519       $ 4,411   
  

 

 

    

 

 

    

 

 

 

Other Long-term Liabilities

Other long-term liabilities consist of the following (in thousands):

 

     As of December 31,      As of September  30,
2011
 
         2009              2010         
                   (Unaudited)  

Stock repurchase liability

   $ 201       $ 2,296       $ 2,407   

Other

     15         595         460   
  

 

 

    

 

 

    

 

 

 

Total other long-term liabilities

   $ 216       $ 2,891       $ 2,867   
  

 

 

    

 

 

    

 

 

 

 

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

7. Other Income (Expense), net

Other income (expense), net is comprised of the following (in thousands):

 

     Years Ended December 31,     Nine Months
Ended September 30,
 
     2008     2009     2010             2010                     2011          
           (Unaudited)  

Other Income:

          

Interest income

   $ 433      $ 202      $ 162      $ 74      $ 24   

Convertible preferred stock warranty liability gains

     —          —          —          15        —     

Forward foreign exchange contract gains, net

     —          24        417        141        49   

Foreign currency exchange gains, net

     —          10        41        179        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     433        236        620        409        73   

Other Expense:

          

Convertible preferred stock warrant liability losses

     —          —          (14     —          (154

Foreign currency exchange losses, net

     (204     —          —          —          (57

Other

     (39     (58     (132     (52     (100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (243     (58     (146     (52     (311
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

   $ 190      $ 178      $ 474      $ 357      $ (238
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

8. Debt

Convertible Promissory Note from Related Party

In November 2009, the Company’s Chief Executive Officer entered into a promissory note agreement with Incapsula for the principal amount of $600,000. Under the terms of the promissory note agreement, interest accrues at a rate of 6% per annum. The outstanding principal amount and unpaid accrued interest under the convertible promissory note was due and payable by Incapsula on the earlier of (i) March 31, 2010, and (ii) the closing of Incapsula’s next equity financing.

The principal and unpaid accrued interest under the convertible promissory note were convertible into Incapsula’s common stock or convertible preferred stock or any other securities issued at a price per share equal to such price per share paid in such round of financing for the same securities. In connection with the convertible promissory note, the Company recorded interest expense of $4,000 and $8,000 for the years ended December 31, 2009 and 2010.

On March 9, 2010, Incapsula repaid the convertible promissory note and the accrued interest to the Company’s Chief Executive Officer.

Revolving Credit Facility

In September 2010, the Company entered into a revolving credit facility with a financial institution. This arrangement gives the Company an initial maximum borrowing capacity of $3.0 million. The

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

Company had $0.5 million and $3.0 million outstanding on the credit facility at December 31, 2010 and September 30, 2011. The credit facility is secured by the assets of the Company and bears interest at LIBOR plus 2% (2.29% and 2.37% at December 31, 2010 and September 30, 2011). The credit facility expires on August 15, 2011 and contains a restrictive covenant that requires the Company to maintain a minimum cash and cash equivalents balance of $3.0 million, and a minimum tangible net worth of $3.0 million. As of December 31, 2010, the Company was compliant with all covenants in the credit facility. In April 2011, the Company and the financial institution amended the terms of the revolving credit facility to delete the minimum tangible net worth requirement and increased the restrictive convent to maintain a minimum cash and cash equivalent balance to $6.0 million. As of September 30, 2011, the Company was compliant with the amended covenant for the credit facility.

9. Commitments and Contingencies

Operating Leases

The Company rents its facilities under operating leases with lease periods expiring from 2013 to 2015. Future minimum payment under these facility operating leases are as follows as of December 31, 2010 (in thousands):

 

Year Ending December 31:

      

2011

   $ 2,147   

2012

     2,145   

2013

     2,139   

2014

     768   

2015

     472   
  

 

 

 

Total

   $ 7,671   
  

 

 

 

During the nine months ended September 30, 2011, the Company made regular payments on the operating leases of $1.8 million.

Rent expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. Rent expense for the years ended December 31, 2008, 2009 and 2010 was $1.1 million, $1.6 million and $2.1 million.

In connection with a lease for office space, the Company received a tenant improvement allowance of $639,000 during the year ended December 31, 2010 from the lessor for certain improvements made to the leased property. The Company has recorded the tenant improvement allowance as a leasehold improvement within property and equipment, net and a deferred rent within other liabilities on the consolidated balance sheets. The deferred rent liability is amortized to rent expense over the term of the lease on a straight-line basis. The leasehold improvements are being amortized to expense over the period from when the improvements were placed into service until the end of their useful life, which is the end of the lease term.

In addition, certain of the Company’s operating lease agreements for office space also include rent holidays and scheduled rent escalations during the initial lease term. The Company has recorded

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

the rent holidays as a deferred rent within other liabilities on the consolidated balance sheets. The Company recognizes the deferred rent liability and scheduled rent increase on a straight-line basis into rent expense over the lease term commencing on the date the Company takes possession of the lease space.

As of December 31, 2009, 2010 and September 30, 2011 the Company has $500,000, $781,000, and $693,000 in restricted deposits to secure bank guarantees provided to the lessor.

Cancelable Lease Agreement

The Company leases motor vehicles under a cancelable operating lease agreement. The Company has an option to cancel the lease agreement, which may result in penalties in a maximum amount of $84,000 and $85,000 as of December 31, 2010 and September 30, 2011. Motor vehicle lease expenses for the years ended December 31, 2008, 2009 and 2010 were $1.1 million, $1.3 million and $1.6 million.

Purchase Commitments

As of December 31, 2010 and September 30, 2011, the Company had purchase commitments of $1.9 million and $3.9 million to purchase inventory, trial units, and research and development equipment from its vendors. The purchase commitments result from the Company’s contractual obligation to order or build inventory in advance of anticipated sales. According to the Company’s agreements with its vendors, the Company committed to purchase inventory within six months from the date the inventory arrived at the vendor’s warehouse.

The Company also provided stand-by letters of credit to its vendors to secure its obligation to purchase the inventory. As of December 31, 2009, 2010 and September 30, 2011 the Company had $0, $498,000, and $560,000 restricted deposits to secure the stand-by letters of credit provided.

Litigation

In May 2010, F5 Networks, Inc., an IT infrastructure company that competes with the Company in the web application firewall market, filed a lawsuit alleging patent infringement by the Company. In June 2010, the Company filed a counterclaim alleging patent infringement by F5 Networks, Inc. As of December 31, 2010, the Company accrued a liability in the amount of $200,000 relating to this complaint. In February 2011, the Company entered into a settlement and license agreement with F5 Networks, Inc., under which the litigation was dismissed.

From time to time, the Company may be subject to other legal proceedings and claims in the ordinary course of business. The Company is not currently a party to any other material litigation; however, the Company has received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of intellectual property rights. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material effect on our consolidated financial position, results of operations, or cash flows.

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

Indemnification

Under the indemnification provisions of its standard sales contracts, the Company agrees to defend its channel partners and end customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments entered on such claims. The Company’s exposure under these indemnification provisions is generally limited to the total amount paid under the agreement. However, certain agreements include indemnification provisions that could potentially expose the Company to losses in excess of the amount received under the agreement. To date, there have been no claims under such indemnification provisions. Accordingly, the Company has not recorded a liability on its consolidated balance sheets for these indemnification provisions.

10. Common Stock Reserved for Issuance

The Company had reserved shares of common stock, on an as if converted basis, for issuance as follows:

 

     As of December 31,
2010
     As of September 30,
2011
 
            (Unaudited)  

Conversion of convertible preferred stock

     10,761,511         10,761,511   

Issuance upon exercise of convertible preferred stock warrant

     19,999         19,999   

Reserved for future issuance under the stock option plan

     1,557,309         929,152   

Issuance in connection with outstanding stock options

     2,763,908         2,944,899   
  

 

 

    

 

 

 
     15,102,727         14,655,561   
  

 

 

    

 

 

 

11. Convertible Preferred Stock

The Company’s authorized, issued and outstanding convertible preferred stock consists of the following (in thousands, except share amounts):

 

     As of December 31, 2009 and 2010
and September 30, 2011
 
     Shares
Authorized
     Shares
Issued and
Outstanding
     Net Cash
Proceeds
 

Series A

     4,666,667         2,333,333       $ 4,624   

Series B

     8,057,335         4,008,665         11,982   

Series C

     5,567,099         2,783,544         16,858   

Series D

     3,275,000         1,635,969         19,978   
  

 

 

    

 

 

    

 

 

 

Total

     21,566,101         10,761,511       $ 53,442   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

The liquidation preference of the Company’s convertible preferred stock is as follows (in thousands)

 

     As of December 31,
2010
     As of September 30,
2011
 
            (Unaudited)  

Liquidation Preferences:

  

Series A

   $ 7,897       $ 8,176   

Series B

     23,013         24,093   

Series C

     26,405         27,924   

Series D

     26,667         28,467   
  

 

 

    

 

 

 

Total

   $ 83,982       $ 88,660   
  

 

 

    

 

 

 

The Company recorded the convertible preferred stock on the dates of issuance, net of issuance costs. The Company classifies the convertible preferred stock outside of stockholders’ equity (deficit) because the shares contain liquidation features that are not solely within the Company’s control. For the years ended December 31, 2008, 2009 and 2010 and for the nine months ended September 30, 2010 and 2011, the Company did not adjust the carrying values of the convertible preferred stock to the deemed liquidation values of such shares since a liquidation event was not probable at each balance sheet date. Subsequent adjustments to increase the carrying values to the ultimate liquidation values will be made only when it becomes probable that such a liquidation event will occur.

The rights, preferences and privileges of the convertible preferred stockholders are as follows:

Conversion Rights

Each share of convertible preferred stock is convertible at the option of the holder into the number of shares of common stock determined by dividing the original issue price by the applicable conversion price. The original issue price per share is $2.00 for Series A, $3.00 for Series B, $6.08 for Series C and $12.2584 for Series D. At the current conversion prices, each share of Series A, Series B, Series C and Series D will convert on a 1-for-1 basis. The conversion price per share for convertible preferred stock shall be adjusted for certain recapitalizations, splits, combinations, common stock dividends or similar events. The convertible preferred stock automatically converts into shares of common stock at the conversion price then in effect upon the earlier of (i) the closing of a firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, in which the initial offering price per share of common stock is not less than $24.5168 per share and the gross cash proceeds to the Company are equal to or exceed $40 million, (ii) when the holders of 80% of the outstanding shares of convertible preferred stock elect conversion; or (iii) a liquidation event in which the aggregate proceeds available for distribution to holders of the various classes of stock is equal to or greater than the larger of (a) $500 million or (b) such proceeds that each share of common stock outstanding following conversion would receive at least $24.5168 per share.

Voting Rights

Each share of convertible preferred stock has a number of votes equal to the number of shares of common stock into which it is convertible. The holders of the Series A convertible preferred stock have

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

the right to elect two directors. The holders of the Series B convertible preferred stock have the right to elect two directors. The holders of the Series C convertible preferred stock have the right to elect one director. The holders of the common stock have the right to elect two directors. The holders of the convertible preferred stock and common stock voting as a single class elect any remaining directors.

The consent of the holders of at least 80% of convertible preferred stock, voting as a single class, is required for any action that consummates a liquidation or redemption event and/or alters or changes the rights, preferences or privileges of any series of the convertible preferred stock.

Liquidation Rights

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A, Series B, Series C and Series D convertible preferred stock are entitled to liquidation preferences in the amount of (i) the original issue price per share of Series A, Series B, Series C and Series D, (ii) any declared and unpaid dividends and (iii) a liquidation preference amount that is 8% of the original issue price per share of the Series A, 12% of the original issue price per share for the Series B, 12% of the original issue price per share for the Series C and 12% of the original issue price per share for the Series D, for each year, or portion thereof, following issuance. Following distribution of the liquidation preferences to the holders of the convertible preferred stock, the remaining proceeds shall be distributed to the holders of the common stock and the convertible preferred stock on a pro rata basis based on the number of shares of common stock held by each (assuming full conversion of all such convertible preferred stock), until the holders of Series D convertible preferred stock have received $24.5168 per share. If proceeds remain thereafter, such remaining proceeds shall be distributed among the holders of Series A, Series B and Series C convertible preferred stock and the holders of common stock pro rata based on the number of shares of common stock held by each (assuming full conversion of all such convertible preferred stock).

Dividend Rights

The holders of the Series A, Series B, Series C and Series D convertible preferred stock are entitled to receive dividends, when and if declared by the board of directors, at the rate of 8% of the applicable original issue price per share per annum on each outstanding share of preferred stock. After the payment of these dividends, any additional dividends or distributions shall be distributed among all holders of common stock and convertible preferred stock in proportion to the number of common stock that would be held by each holder if all shares of convertible preferred stock were converted to common stock at the then effective conversion rate. No dividends have been declared through September 30, 2011.

Redemption Rights

The Series A, Series B, Series C and Series D convertible preferred stock are not redeemable.

12. Convertible Preferred Stock Warrants

In December 2005, the Company entered into a Loan and Security Agreement with two venture lending companies for a credit line of $3.0 million, which terminated in December 31, 2006. In conjunction with this loan agreement, the Company issued to the lenders warrants to purchase an

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

aggregate amount of 19,999 shares of the Company’s Series B convertible preferred stock at an exercise price of $3.00 per share with a contractual term through December 2015. The fair value of the Series B warrants on the date of issuance was $55,000.

As of December 31, 2009 and 2010 and September 30, 2011, the Series B convertible preferred stock warrants were outstanding. At each reporting date, the Company re-measures the convertible preferred stock warrant liability to fair value using the Black-Scholes option-pricing model with the following assumptions:

 

     Years Ended December 31,     Nine Months
Ended September 30,
 
     2008     2009     2010     2010     2011  
           (Unaudited)  

Dividend rate

     0     0     0     0     0

Risk-free interest rate

     1.9     2.7     2.0     1.3     0.9

Remaining contractual life (in years)

     7.0        6.0        5.0        5.3        4.2   

Expected volatility

     75     57     54     54     59

The fair value of the warrants was $55,000, $69,000, and $223,000 as of December 31, 2009, 2010 and September 30, 2011, which was recorded as a convertible preferred stock warrant liability on the consolidated balance sheets. The change in the fair value of the warrant resulted in a gain (loss) through other income (expense), net in the consolidated statements of operations.

13. Stock Option Plans

The Company recognized stock-based compensation expense under the 2003 Stock Option Plan, the Incapsula 2010 Share Incentive Plan and restricted stock in the consolidated statements of operations as follows (in thousands):

 

     Years Ended December 31,      Nine Months
Ended September 30,
 
       2008          2009          2010            2010              2011      
                          (Unaudited)  

Cost of revenues

   $ 22       $ 37       $ 44       $ 28       $ 73   

Research and development

     41         57         66         37         83   

Sales and marketing

     163         218         257         191         245   

General and administrative

     48         109         273         60         753   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 274       $ 421       $ 640       $ 316       $ 1,154   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

2003 Stock Option Plan

During 2003, the Company adopted the 2003 Stock Plan (the “Plan”), which allows for the granting of both incentive and nonstatutory stock options to employees, directors and service providers of the Company. Incentive stock options may be granted to employees with exercise prices of no less than the fair value of the common stock on the grant date, and non-statutory options may be granted to employees, directors, or consultants at exercise prices of no less than 85% of the fair value of the

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

common stock on the grant date, as determined by the Board of Directors. If, at the time the Company grants an option, the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the option price shall be at least 110% of the fair value. Options granted under the Plan generally expire no later than ten years and general vest four years from the date of grant.

The following table summarizes option activity under the Plan and related information:

 

    Shares
Available
for Grant
    Number of
Stock Options
Outstanding
    Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Life (Years)
    Aggregate
Intrinsic
Value

(in  thousands)
 

Outstanding—January 1, 2008

    1,135,947        1,718,047      $ 0.80        8.80      $ 320   

Granted

    (906,804     906,804        1.48       

Exercised

    —          (275,245     0.76       

Forfeited

    306,041        (306,041     0.86       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding—December 31, 2008

    535,184        2,043,565      $ 1.10        7.61        1,120   

Additional options authorized

    470,991        —           

Granted

    (1,330,675     1,330,675        1.64       

Exercised

    —          (274,458     0.82       

Forfeited

    547,268        (547,268     1.32       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding—December 31, 2009

    222,768        2,552,514      $ 1.36        8.29        700   

Additional options authorized

    1,978,458        —           

Granted

    (1,243,111     1,243,111        2.64       

Exercised

    —          (432,523     1.36       

Forfeited

    599,194        (599,194     1.58       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding—December 31, 2010

    1,557,309        2,763,908      $ 1.90        8.09        4,999   

Granted (unaudited)

    (930,000     930,000        7.82       

Exercised (unaudited)

    —          (447,166     3.36       

Forfeited (unaudited)

    301,843        (301,843     2.48       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding—September 30, 2011 (unaudited)

    929,152        2,944,899      $ 3.48        7.97      $ 30,139   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Vested and expected to vest—December 31, 2010

      2,330,664      $ 1.84        7.96      $ 4,354   
   

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable—December 31, 2010

      1,073,968      $ 1.26        6.72      $ 2,618   
   

 

 

   

 

 

   

 

 

   

 

 

 

Vested and expected to vest—September 30, 2011 (unaudited)

      2,614,756      $ 3.48        7.72      $ 27,121   
   

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable—September 30, 2011 (unaudited)

      1,149,366      $ 1.44        6.42      $ 14,105   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

Additional information regarding the Company’s stock options outstanding and vested as of December 31, 2010 is summarized below:

 

     Options Outstanding      Options Exercisable  

Exercise Prices

   Number of
Stock Options
Outstanding
     Weighted-
Average
Remaining
Contractual
Life (Years)
     Weighted-
Average
Exercise
Price per
Share
     Shares Subject
to Stock Options
     Weighted-
Average
Exercise
Price per
Share
 

$0.40 - $1.22

     597,075         5.87       $ 0.81         536,428       $ 0.82   

$1.23 - $2.06

     1,479,172         8.23       $ 1.66         520,040       $ 1.64   

$2.07 - $2.88

     124,300         9.43       $ 2.52         —         $ —     

$2.89 - $3.70

     563,361         9.79       $ 3.50         17,500       $ 3.70   
  

 

 

          

 

 

    
     2,763,908         8.09       $ 1.90         1,073,968       $ 1.26   
  

 

 

          

 

 

    

Additional information regarding the Company’s stock options outstanding and vested as of September 30, 2011 is summarized below (unaudited):

 

     Options Outstanding      Options Exercisable  

Exercise Prices

   Number of
Stock Options
Outstanding
     Weighted-
Average
Remaining
Contractual
Life (Years)
     Weighted-
Average
Exercise
Price per
Share
     Shares Subject
to Stock Options
     Weighted-
Average
Exercise
Price per
Share
 

$0.40 - $2.97

     1,669,276         6.86       $ 1.48         1,073,645       $ 1.32   

$2.98 - $5.55

     873,848         9.23       $ 4.44         75,721       $ 3.40   

$5.56 - $8.12

     142,150         9.63       $ 8.06         —         $ —     

$8.13 - $10.70

     259,625         9.90       $ 10.70         —         $ —     
  

 

 

          

 

 

    
     2,944,899         7.97       $ 3.48         1,149,366       $ 1.44   
  

 

 

          

 

 

    

Determining the Fair Value of Stock Options

The fair value of each grant of stock options was determined by the Company and its board of directors using the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.

Expected Term —The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. For option grants that are considered to be “plain vanilla,” the Company used the simplified method to determine the expected term as provided by the Securities and Exchange Commission. The simplified method is calculated as the average of the time-to-vesting and the contractual life of the options. For other option grants, the expected term is derived from historical data on employee exercises and post-vesting employment termination behavior taking into account the contractual life of the award.

Expected Volatility —The expected volatility was based on the historical stock volatilities of several of the Company’s publicly listed peers over a period equal to the expected terms of the options as the Company did not have a sufficient trading history to use the volatility of its own common stock.

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

Fair Value of Common Stock —The fair value of the shares of common stock underlying the stock options has historically been determined by the board of directors. Because there has been no public market for the Company’s common stock, the board of directors has determined fair value of the common stock at the time of grant of the option by considering a number of objective and subjective factors including valuation of comparable companies, sales of convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic outlook, amongst other factors. The Company has not granted stock options with an exercise price that is less than the fair value of the underlying common stock as determined at the time of grant by the Company’s board of directors, with input from management. The fair value of the underlying common stock shall be determined by the board of directors until such time as the Company’s common stock is listed on an established stock exchange or national market system. The Company’s board of directors determined the fair value of common stock based on valuations performed using the option pricing method (OPM) in periods prior to February 1, 2011. Subsequent to February 1, 2011, the common stock valuation was determined using the probability weighted expected return method (PWERM) as the Company began to consider initial public offering (IPO) activities.

Risk-Free Interest Rate —The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the option’s expected term.

Expected Dividend —The Company has never paid dividends and does not expect to pay dividends.

Forfeiture Rate —The Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual number of future forfeitures differs from that estimated by the Company, the Company may be required to record adjustments to stock-based compensation expense in future periods.

A summary of the weighted-average assumptions is as follows:

 

     Years Ended December 31,     Nine Months Ended September 30,  
     2008     2009     2010     2010     2011  
           (Unaudited)  

Dividend rate

     0     0     0     0     0

Risk-free interest rate

     3.0     2.5     2.2     2.1     2.0

Expected term (in years)

     6.0        6.0        6.1        5.6        5.8   

Expected volatility

     58     55     51     51     49

The weighted-average grant date fair value of the Company’s stock options granted during the years ended December 31, 2008, 2009 and 2010 and for the nine months ended September 30, 2010 and 2011 was $0.60, $0.64, $1.36, $1.22, and $4.50 per share. The aggregate grant date fair value of the Company’s stock options granted to employees during the years ended December 31, 2008, 2009 and 2010 and during the nine months ended September 30, 2010 and 2011 was $547,000, $847,000, $1.7 million, $1.2 million, and $4.2 million.

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

The aggregate intrinsic value of options exercised under the Plan was $243,000, $194,000, $430,000, $255,000, and $1.8 million for the years ended December 31, 2008, 2009 and 2010 and during the nine months ended September 30, 2010 and 2011. The aggregate intrinsic value is calculated as the difference between the per-share exercise price and the deemed fair value of the Company’s common stock for each share subject to an option multiplied by the number of shares subject to options at the date of exercise. The Board of Directors deemed the fair value of the Company’s common stock to be $3.70 per share as of December 31, 2010.

As of December 31, 2010 and September 30, 2011, total compensation cost related to unvested stock-based awards granted to employees under the Plan, but not yet recognized, was $1.4 million and $3.9 million, net of estimated forfeitures. As of December 31, 2010 and September 30, 2011, this cost will be amortized to expense over a weighted-average remaining period of 2.9 years and 2.8 years and will be adjusted for subsequent changes in estimated forfeitures. Future option grants will increase the amount of compensation expense to be recorded in these periods.

There was no capitalized stock-based compensation cost and there were no recognized stock-based compensation tax benefits during the years ended December 31, 2008, 2009 and 2010 and during the nine months ended September 30, 2010 and 2011.

Incapsula 2010 Share Incentive Plan

In March 2010, Incapsula’s board of directors adopted the Incapsula 2010 Share Incentive Plan (the “Incapsula Plan”), pursuant to which Incapsula may grant to its employees and service providers options to purchase shares of its common stock, restricted shares, or restricted share units. The total number of shares of common stock that may be granted under the Incapsula Plan shall not exceed 4,733,333 in the aggregate, subject to certain adjustments.

The following table summarizes option activity under the Incapsula Plan and related information:

 

     Shares
Available
for Grant
    Number
of Stock Options
Outstanding
    Weighted-
Average
Exercise
Price
 

Outstanding—December 31, 2009

     —          —        $ —     

Options authorized

     4,733,333        —          —     

Granted

     (1,244,000     1,244,000        0.02   

Exercised

     —          —          —     

Forfeited

     100,000        (100,000     0.09   
  

 

 

   

 

 

   

 

 

 

Outstanding—December 31, 2010

     3,589,333        1,144,000        0.01   

Granted(unaudited)

     (1,050,000     1,050,000        0.18   

Exercised (unaudited)

     —          (25,000     0.09   

Forfeited (unaudited)

     162,500        (162,500     0.12   
  

 

 

   

 

 

   

 

 

 

Outstanding—September 30, 2011 (unaudited)

     2,701,833        2,006,500      $  0.09   
  

 

 

   

 

 

   

 

 

 

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

14. Other Equity Issuances

Common Stock Subject to Repurchase

Pursuant to restricted stock agreements with the Company’s CEO, the Company has the right, but not the obligation, to repurchase the unvested shares of common stock upon termination of employment at the original purchase price per share. The repurchase rights with respect to the common stock lapse over the vesting period, which ranges from 48 months to 60 months. The amounts received in exchange for these shares have been included in other liabilities in the accompanying consolidated balance sheet and are reclassified to equity as the shares vest. The Company granted 843,819 restricted shares of common stock with a weighted-average grant date fair value per share of $1.94 during the year ended December 31, 2010 and during the nine months ended September 30, 2010. There were no grants of restricted shares of common stock during the years ended December 31, 2008, 2009 and during the nine months ended September 30, 2011. As of December 31, 2010 and September 30, 2011, 1,078,398 and 880,628 restricted shares of common stock held by the Company’s CEO were unvested and subject to repurchase by the Company.

Early Exercise of Stock Options

In 2010 and 2011, the Company’s board of directors allowed for the early exercise of stock options granted to certain members of the Company’s board of directors. The amounts received in exchange for these shares have been included in other liabilities in the accompanying consolidated balance sheet and are reclassified to equity as the shares vest. As of December 31, 2010 and September 30, 2011, 60,000 and 131,250 shares were unvested.

15. Income Taxes

The Company’s geographical breakdown of its loss before provision for income taxes is as follows (in thousands):

 

      Years Ended December 31,     Nine Months
Ended September 30,
 
      2008     2009     2010         2010             2011      
                      (Unaudited)  

Domestic

  $ (8,277   $ (13,551   $ (14,153     (10,110   $ (10,456

Foreign

    851        1,572        2,312        1,248        1,696   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for taxes

  $ (7,426   $ (11,979   $ (11,841   $ (8,862   $ (8,760
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

The components of the provision for income taxes are as follows (in thousands):

 

       Years Ended December 31,     Nine Months
Ended September 30,
 
         2008         2009         2010         2010         2011    
                       (Unaudited)  

Current

          

Federal

   $ —        $ —        $ —        $ —        $ —     

State

     15        18        12        9        9   

Foreign

     284        354        568        362        467   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current provision

     299        372        580        371        476   

Deferred

          

Federal

     —          —          —          —          —     

State

     —          —          —          —          —     

Foreign

     (70     (12     (53     (40     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deferred provision

     (70     (12     (53     (40     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 229      $ 360      $ 527      $ 331      $ 471   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of the provision for income taxes at the statutory rate to the Company’s provision for income tax are as follows (in thousands):

 

      Years Ended December 31,     Nine Months
Ended September 30,
 
          2008             2009             2010             2010             2011      
                      (Unaudited)  

Tax benefit at federal statutory tax rate

  $ (2,525   $ (4,073   $ (4,026   $ (2,995   $ (2,906

Tax benefit at state statutory tax rate

    (295     (481     (482     (345     (334

Tax benefit resulting from “beneficiary enterprise”

    (76     (133     (37     (28     (59

Foreign tax rate differential

    (82     (151     (207     (114     (128

Unbenefited loss of consolidated investment

    —          39        513        360        740   

Change in valuation allowance

    3,055        4,162        4,081        3,277        2,936   

Meals and entertainment

    54        411        124        92        105   

Sale of license

    —          515        —          —          —     

Stock compensation

    62        82        97        73        78   

Shortfall Related to 83(b) Election

    —          —          530        —          —     

Nondeductible expenses and other

    36        (11     (66     11        39   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for income taxes

  $ 229      $ 360      $ 527      $ 331      $ 471   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

Significant components of the Company’s net deferred tax assets are as follows (in thousands):

 

     As of December 31,     As of
September 30,

2011
 
             2009                 2010          
                 (Unaudited)  

Deferred tax assets:

      

Reserves and accruals

   $ 582      $ 645      $ 604   

Deferred revenue

     4,258        7,902        9,183   

Stock based compensation

     76        —          —     

Net operating loss carryforwards

     10,797        11,628        13,397   
  

 

 

   

 

 

   

 

 

 

Gross deferred tax assets

     15,713        20,175        23,184   

Valuation allowance

     (15,359     (19,440     (22,427
  

 

 

   

 

 

   

 

 

 

Deferred tax assets

     354        735        757   

Deferred tax liabilities:

      

Stock based compensation

     —          (392     (287

Depreciation and amortization

     (163     (172     (187
  

 

 

   

 

 

   

 

 

 

Total deferred tax liabilities

     (163     (564     (474
  

 

 

   

 

 

   

 

 

 

Net deferred tax assets

   $ 191      $ 171      $ 283   
  

 

 

   

 

 

   

 

 

 

Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon the weight of available evidence, which includes the Company’s historical operating performance and the recorded cumulative net losses in all prior fiscal periods, the Company has provided a full valuation allowance against its U.S. deferred tax assets. The Company’s valuation allowance increased by $4.2 million and $4.1 million in the years ended December 31, 2009 and 2010, respectively.

As of December 31, 2010, the Company had U.S. federal and state net operating loss carryforwards of approximately $31.1 million and $19.4 million, respectively. The U.S. federal net operating loss carryforwards will expire at various dates beginning in 2023 through 2031 if not utilized. Most state net operating loss carryforwards will expire at various dates beginning in 2018 through 2032.

The Company uses the “with-and-without” approach to determine the recognition and measurement of excess tax benefits. Accordingly, the Company has elected to recognize excess income tax benefits from stock option exercises in additional paid in capital only if an incremental income tax benefit would be realized after considering all other tax attributes presently available to the Company. As of December 31, 2010, the amount of such excess tax benefits from stock options included in net operating losses was insignificant. In addition, the Company has elected to account for the indirect effects of stock-based awards on other tax attributes, such as the research and alternative minimum tax credits, through the statement of operations.

Net operating loss carryforwards reflected above are subject to limitations due to ownership changes as provided in the Internal Revenue Code and similar state provisions.

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

The Company has not provided U.S. income tax on certain foreign earnings that are deemed to be indefinitely invested outside the U.S. For 2008, 2009, and 2010, the amount of accumulated unremitted earnings from the Company’s foreign subsidiaries is approximately $0.7 million, $1.7 million and $3.9 million. Determination of the amount of unrecognized deferred U.S. income tax liability is not practical due to the complexities associated with the hypothetical calculation.

Effective January 1, 2007, the company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FASB ASC 740-10”). There was not a material impact on the Company’s consolidated financial position and results of operations as a result of the adoption of the provisions of FIN 48. Upon adoption of FIN 48 on January 1, 2007, the Company recognized no change in its liability for unrecognized income tax benefits and Retained Earnings. As of December 31, 2008, the Company had gross unrecognized tax benefits of approximately $65,000, all of which would impact the effective tax rate if recognized. As of December 31, 2009, the Company had gross unrecognized tax benefits of approximately $112,000, all of which would impact the effective tax rate if recognized. As of December 31, 2010, the Company had gross unrecognized tax benefits of approximately $171,000, all of which would impact the effective tax rate if recognized. While it is often difficult to predict the final outcome of any particular uncertain tax position, the Company does not believe that the amount of unrecognized tax benefits will change significantly in the next twelve months.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in its income tax provision. For the years ended December 31, 2008, 2009 and 2010, the Company accrued interest of $0, $6,000 and, $13,000 in income tax expense, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 

       2008          2009          2010    

Balance at January 1

   $ —         $ 65       $ 112   

Additions based on tax positions taken during a prior period

     —           —           —     

Reductions based on tax positions taken during a prior period

     —           —           —     

Additions based on tax positions taken during the current period

     65         47         59   

Reductions based on tax positions taken during the current period

     —           —           —     

Additions relating to settlements with taxing authorities

     —           —           —     

Reductions as a result of a lapse of the applicable statute of limitations

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Balance at December 31

   $ 65       $ 112       $ 171   
  

 

 

    

 

 

    

 

 

 

The Company’s material tax jurisdictions are the United States federal, California and Israel. The Company is subject to examination by the appropriate governmental agencies for tax years 2005 and forward for Israel. As a result of net operating loss carryforwards, the Company is subject to audit for tax years 2002 and forward for federal purposes and 2003 and forward for California purposes.

The Company’s Israeli subsidiary’s research and development intercompany services have a “Beneficiary Enterprise” status for a separate investment program that was elected by the Israel subsidiary under the Law for Encouragement of Capital Investments, 1959 (the “Investments Law”), which was amended on April 1, 2005.

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

Undistributed Israeli income derived from its “Beneficiary Enterprise” program entitles the Israeli subsidiary to a tax exemption for a period of two years and to a reduced tax rate of 10% - 25% for an additional period of five to eight years (depending on the level of non-Israeli investment in the Company). These tax benefits are subject to a limitation of 12 years from activation of the program.

The entitlement to the above benefits is conditional upon the Israeli subsidiary fulfilling the conditions stipulated by the Investments Law and regulations published there under.

Should the Israeli subsidiary fail to meet such requirements in the future, income attributable to its Beneficiary Enterprise programs could be subject to the statutory Israeli corporate tax rate, and the Israeli subsidiary could be required to refund the tax benefits already received with respect to such program, in whole or in part, including interest.

Through December 31, 2010 and September 30, 2011, the Israeli subsidiary had $1.5 million and $1.8 million, respectively, of tax exempt income attributed to its Beneficiary Enterprise program. If such tax-exempt income is distributed in a merger or a regular distribution or upon complete liquidation of the Israeli subsidiary, it would be taxed at the corporate tax rate applicable to such profits and an income tax liability of up to $0.4 million and $0.5 million, respectively, would be incurred as of December 31, 2010 and September 30, 2011.

The Israeli subsidiary has determined that it will not distribute any amounts of its undistributed tax-exempt income as dividend and it intends to reinvest its tax-exempt income. Accordingly, no deferred income taxes have been provided on income attributable to the Israeli subsidiary’s Beneficiary Enterprise programs as the undistributed tax-exempt income is essentially permanent in duration.

16. Segment Information

The Company has two operating segments which are also both reportable business segments: (i) Imperva, which is comprised of Imperva’s and its wholly-owned subsidiaries’ financial position and results of operations; and (ii) Incapsula, which is comprised entirely of the financial position and results from operations of the Company’s majority owned subsidiary, which commenced operations in late 2009.

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

The following table presents a summary of our operating segments (in thousands):

 

     Years Ended December 31,     Nine Months Ended September 30,  
     2008     2009     2010          2010               2011       
                       (Unaudited)  

Imperva:

          

Net revenue

   $ 32,146      $ 39,341      $ 55,382      $ 38,398      $ 54,952   

Operating loss

     (7,616     (12,061     (10,889     (8,236     (6,617

Provision for income tax

     229        359        489        318        443   

Net loss

     (7,655     (12,236     (10,982     (8,232     (7,254

Depreciation and amortization

     455        672        1,159        772        1,101   

Stock-based compensation

     274        421        583        266        1,137   

Total assets

   $ 38,535      $ 36,987      $ 39,245      $ 31,925      $ 39,028   

Incapsula:

          

Net revenue

   $ —        $ —        $ —        $ —        $ 35   

Operating loss

     —          (96     (1,426     (983     (1,905

Provision for income tax

     —          1        38        13        28   

Net loss

     —          (103     (1,386     (961     (1,977

Depreciation and amortization

     —          —          11        7        22   

Stock-based compensation

     —          —          57        50        17   

Total assets

   $ —        $ 559      $ 1,732      $ 2,146      $ 3,437   

Supplemental Information

The Company’s net services revenue comprised of the following (in thousands):

 

     Years Ended December 31,      Nine Months Ended September 30,  
     2008      2009      2010           2010                2011       
            (Unaudited)  

Maintenance and support

   $ 7,192       $ 11,840       $ 18,064       $ 12,916       $ 17,766   

Professional services and training

     656         1,763         2,465         1,716         3,478   

Subscriptions

     —           11         374         234         922   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net services revenue

   $ 7,848       $ 13,614       $ 20,903       $ 14,866       $ 22,166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s net revenue by geographic region, based on the customer’s location, is summarized as follows (in thousands):

 

     Years Ended December 31,      Nine Months Ended September 30,  
     2008      2009      2010           2010                2011       
            (Unaudited)  

Americas

   $ 21,770       $ 24,869       $ 36,586       $ 25,519       $ 34,316   

EMEA

     6,706         9,929         13,492         9,085         12,805   

Asia Pacific

     3,670         4,543         5,304         3,794         7,866   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenue

   $ 32,146       $ 39,341       $ 55,382       $ 38,398       $ 54,987   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

The following table presents long-lived assets by location (in thousands):

 

    As of December 31,      As of September  30,
2011
 
    2008          2009          2010     
                         (Unaudited)  

United States

  $ 806       $ 1,004       $ 2,066       $ 1,865   

Israel

    1,034         1,340         2,010         2,134   

Other

    15         34         25         14   
 

 

 

    

 

 

    

 

 

    

 

 

 

Total long-lived assets

  $ 1,855       $ 2,378       $ 4,101       $ 4,013   
 

 

 

    

 

 

    

 

 

    

 

 

 

17. Net Loss per Share

The following table sets forth the computation of the Company’s basic and diluted net loss per share of common stock (in thousands, except for share and per share amounts):

 

     Years Ended December 31,     Nine Months Ended September 30,  
       2008     2009     2010             2010                     2011          
                       (Unaudited)  

Net loss attributable to Imperva, Inc. stockholders

   $ (7,655   $ (12,296   $ (12,013   $ (8,937   $ (8,773
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net loss per share of common stock, basic and diluted

     3,860,033        4,365,359        4,884,665        4,846,160        5,334,581   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock, basic and diluted

   $ (1.98   $ (2.82   $ (2.46   $ (1.84   $ (1.64
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been antidilutive:

 

     Years Ended December 31,      Nine Months Ended September 30,  
       2008      2009      2010              2010                      2011          
            (Unaudited)  

Convertible preferred stock

     10,761,511         10,761,511         10,761,511         10,761,511         10,761,511   

Stock options to purchase common stock

     2,043,565         2,552,514         2,763,908         2,639,138         2,944,899   

Restricted shares of common stock subject to repurchase

     439,835         302,997         1,138,488         1,138,488         1,011,878   

Convertible preferred stock warrants

     19,999         19,999         19,999         19,999         19,999   

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

The following table sets forth the computation of the Company’s pro forma basic and diluted net loss per share of common stock (unaudited and in thousands, except for share and per share amounts):

 

       Year Ended
December 31, 2010
    Nine Months
Ended
September 30, 2011
 

Net loss attributable to Imperva, Inc. stockholders

   $ (12,013   $ (8,773

Pro forma adjustment to reflect change in fair value of convertible preferred stock warrants liabilities

     14        154   
  

 

 

   

 

 

 

Net loss attributable to Imperva, Inc. stockholders used in computing pro forma net loss per share of common stock, basic and diluted

   $ (11,999   $ (8,619
  

 

 

   

 

 

 

Shares used in computing net loss per share of common stock, basic and diluted

     4,884,665        5,334,581   

Pro forma adjustments to reflect assumed conversion of convertible preferred stock

     10,761,511        10,761,511   
  

 

 

   

 

 

 

Shares used in computing pro forma net loss per share of common stock, basic and diluted

     15,646,176        16,096,092   
  

 

 

   

 

 

 

Pro forma net loss per share of common stock, basic and diluted

   $ (0.77   $ (0.54
  

 

 

   

 

 

 

18. Subsequent Events (Unaudited)

Incapsula

Pursuant to the terms of the Incapsula Series A and Series A-1 Purchase agreement, the Company purchased 4,375,000 shares of Incapsula’s Series A-1 Preferred Stock for $3.5 million as Incapsula achieved certain performance milestones in July 2011, thereby increasing its ownership interest in Incapsula to 82% at the date of issuance. In addition, the Company intends to invest an additional $3.5 million in Incapsula and will receive 4,375,000 additional shares of Incapsula’s Series A-1 Preferred Stock. The purchase of the additional interest is scheduled to occur on or before March 31, 2012, with the specific date to be mutually agreed upon between the Company and Incapsula.

Authorized Stock Changes

In September 2011, the Company’s board of directors approved a restated certificate of incorporation that will increase the authorized common stock to 145,000,000 shares and authorize 5,000,000 shares of preferred stock immediately prior to the completion of the initial public offering of the Company’s common stock.

2011 Stock Option and Incentive Plan

In September 2011, the Company’s board of directors approved the 2011 Stock Option and Incentive Plan which will become effective upon the completion of the initial public offering of the

 

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Table of Contents

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts as of September 30, 2011 and for the nine month periods

ended September 30, 2010 and 2011 are unaudited)

 

Company’s common stock. A total of 1,000,000 shares of common stock were initially reserved for future issuance under the 2011 Stock Option and Incentive Plan plus any shares of common stock which are forfeited, cancelled or terminated (other than by exercise) under the Company’s 2003 Stock Plan subsequent to the effectiveness of the 2011 Stock Option and Incentive Plan.

2011 Employee Stock Purchase Plan

In September 2011, the Company’s board of directors adopted the 2011 Employee Stock Purchase Plan, or ESPP, which will become effective upon the completion of the initial public offering of the Company’s common stock. A total of 500,000 shares of common stock were initially reserved for future issuance under the 2011 ESPP.

 

F-48


Table of Contents

LOGO


Table of Contents

 

 

5,000,000 Shares

Imperva, Inc.

Common Stock

 

 

LOGO

 

 

 

 

J.P. Morgan

Deutsche Bank Securities

RBC Capital Markets

 

Lazard Capital Markets

Pacific Crest Securities

Through and including                     , 2011 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

 


Table of Contents

Part II

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution.

The expenses (other than underwriting discounts and commissions) payable by us in connection with this offering are as follows:

 

     Amount  

Securities and Exchange Commission Registration fee

   $ 10,656   

Financial Industry Regulatory Authority, Inc. fee

   $ 9,700   

New York Stock Exchange listing Fee

   $ 130,000   

Accountants’ fees and expenses

   $ 2,500,000   

Legal fees and expenses

   $ 1,400,000   

Transfer Agent’s fees and expenses

   $ 15,000   

Printing and engraving expenses

   $ 250,000   

Miscellaneous

   $ 184,644   
  

 

 

 

Total Expenses

   $ 4,500,000   
  

 

 

 

All expenses are estimated except for the Securities and Exchange Commission fee and the Financial Industry Regulatory Authority, Inc. fee.

 

Item 14. Indemnification of Directors and Officers.

Section 145 of the Delaware General Corporation Law (the “DGCL”) authorizes a corporation to indemnify its directors and officers against liabilities arising out of actions, suits and proceedings to which they are made or threatened to be made a party by reason of the fact that they have served or are currently serving as a director or officer to a corporation. The indemnity may cover expenses (including attorneys’ fees) judgments, fines and amounts paid in settlement actually and reasonably incurred by the director or officer in connection with any such action, suit or proceeding. Section 145 permits corporations to pay expenses (including attorneys’ fees) incurred by directors and officers in advance of the final disposition of such action, suit or proceeding. In addition, Section 145 provides that a corporation has the power to purchase and maintain insurance on behalf of its directors and officers against any liability asserted against them and incurred by them in their capacity as a director or officer, or arising out of their status as such, whether or not the corporation would have the power to indemnify the director or officer against such liability under Section 145.

We have adopted provisions in our certificate of incorporation and bylaws to be in effect at the completion of this offering that limit or eliminate the personal liability of our directors and executive officers to the fullest extent permitted by the DGCL, as it now exists or may in the future be amended. Consequently, a director or executive officer will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for:

 

  Ÿ  

any breach of the director’s or executive officer’s duty of loyalty to us or our stockholders;

 

  Ÿ  

any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

  Ÿ  

any unlawful payments related to dividends or unlawful stock purchases, redemptions or other distributions; or

 

  Ÿ  

any transaction from which the director or executive officer derived an improper personal benefit.

 

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These limitations of liability do not alter director liability under the federal securities laws and do not affect the availability of equitable remedies such as an injunction or rescission.

In addition, our bylaws provide that:

 

  Ÿ  

we will indemnify our directors and executive officers and, in the discretion of our board of directors, certain employees and agents to the fullest extent permitted by the DGCL, as it now exists or may in the future be amended; and

 

  Ÿ  

we will advance reasonable expenses, including attorneys’ fees, to our directors and executive officers, and, in the discretion of our board of directors, to certain employees and agents, in connection with legal proceedings relating to their service for or on behalf of us, subject to limited exceptions.

We have entered into indemnification agreements with each of our directors and executive officers. These agreements provide that we will indemnify each of our directors, executive officers and, at times, their affiliates to the fullest extent permitted by the DGCL. We will advance expenses, including attorneys’ fees (but excluding judgments, fines and settlement amounts), to each indemnified director, executive officer or affiliate in connection with any proceeding in which indemnification is available and we will indemnify our directors and executive officers for any action or proceeding arising out of that person’s services as a director or executive officer brought on behalf of the Company and/or in furtherance of our rights. Additionally, certain of our directors may have certain rights to indemnification, advancement of expenses and/or insurance provided by their affiliates, which indemnification relates to and might apply to the same proceedings arising out of such director’s services as a director referenced herein. Nonetheless, we have agreed in the indemnification agreements that the Company’s obligations to those same directors are primary and any obligation of the affiliates of those directors to advance expenses or to provide indemnification for the expenses or liabilities incurred by those directors are secondary.

We also maintain general liability insurance which covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers, including liabilities under the Securities Act.

The underwriting agreement filed as Exhibit 1.1 to this registration statement provides for indemnification of us and our directors and officers by the underwriters against certain liabilities under the Securities Act and the Exchange Act.

 

Item 15. Recent Sales of Unregistered Securities.

In the three years preceding the filing of this registration statement, we have sold and issued the following unregistered securities:

(a) Issuances of Capital Stock

On April 2, 2008 and July 10, 2008, we sold an aggregate of 1,635,969 shares of our Series D convertible preferred stock at a purchase price per share of $12.2584, for an aggregate purchase price of $20,054,418 to accredited investors.

On September 30, 2010, we sold an aggregate of 843,819 shares of our common stock at a purchase price per share of $3.30, for an aggregate purchase price of $2,784,604 to an accredited investor.

No underwriters were used in the foregoing transactions. Unless otherwise stated, the sales of securities described above were deemed to be exempt from registration pursuant to Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. All of the purchasers in these transactions represented to us in connection with their purchase that they were acquiring the securities

 

II-2


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for investment and not distribution, that they could bear the risks of the investment and could hold the securities for an indefinite period of time. Such purchasers received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration or an available exemption from such registration. All of the foregoing securities are deemed restricted securities for the purposes of the Securities Act.

(b) Grants and Exercises of Stock Options and Restricted Stock

In the three years preceding the filing of this registration statement, we have issued under our 2003 Stock Plan, (i) 90,000 shares of restricted stock to certain of our directors at a purchase price of $10.70 per share and (ii) options to purchase an aggregate of 3,820,704 shares of our common stock to certain of our directors, officers, employees and service providers at exercise prices ranging from $1.64 to $10.70 per share. Of these options, 459,939 have been exercised.

The issuances of the securities described above were deemed to be exempt from registration pursuant to either Rule 701 promulgated under the Securities Act as transactions pursuant to compensatory benefit plans or pursuant to Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. The shares of common stock issued upon the exercise of options are deemed to be restricted securities for purposes of the Securities Act.

 

Item 16. Exhibits and Financial Statement Schedules.

 

  (a) Exhibits

See the Exhibit Index on the page immediately following the signature page for a list of exhibits filed as part of this registration statement on Form S-1, which Exhibit Index is incorporated herein by reference.

 

  (b) Schedules

All schedules are omitted because the required information is either not present, not present in material amounts or is presented within the consolidated financial statements included in the prospectus that is part of this registration statement.

 

Item 17. Undertakings.

The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification by the registrant against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by the controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

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The undersigned registrant hereby undertakes that:

 

  Ÿ  

For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

  Ÿ  

For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Redwood Shores, State of California, on this 27th day of October, 2011.

Imperva, Inc.
B Y :  

/ S /    S HLOMO K RAMER

  Shlomo Kramer, Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

 

/ S /    S HLOMO K RAMER

Shlomo Kramer

   President, Chief Executive Officer and Director (Principal Executive Officer)   October 27, 2011

 

/ S /    T ERRENCE J. S CHMID

Terrence J. Schmid

  

Chief Financial Officer

(Principal Financial and Accounting Officer)

  October 27, 2011

 

*

Michael Boodaei

   Director   October 27, 2011

 

*

Asheem Chandna

   Director   October 27, 2011

 

*

Theresia Gouw Ranzetta

   Director   October 27, 2011

 

*

Steven Krausz

   Director   October 27, 2011

 

*

Albert A. Pimentel

   Director   October 27, 2011

 

*

Frank Slootman

   Director   October 27, 2011

 

*

David N. Strohm

   Director   October 27, 2011

 

*By:

 

/ S /    S HLOMO K RAMER        

 

Shlomo Kramer

Attorney-in-fact

 

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EXHIBIT LIST

 

Number

  

Description

  1.1*   

Form of Underwriting Agreement

  3.1†   

Amended and Restated Certificate of Incorporation, as currently in effect

  3.2†   

Certificate of Amendment to the Amended and Restated Certificate of Incorporation, as currently in effect

  3.3   

Form of Restated Certificate of Incorporation (to be effective upon completion of this offering)

  3.4†   

Bylaws of the Company (formerly known as WebCohort Inc.), as currently in effect

  3.5*   

Form of Certificate of Amendment to the Amended and Restated Certificate of Incorporation (to be effective prior to the effectiveness of this registration statement)

  3.6   

Form of Amended and Restated Bylaws (to be effective upon completion of this offering)

  4.1   

Specimen certificate evidencing shares of common stock

  4.2†   

Warrant to Purchase Stock issued December 22, 2005 to Silicon Valley Bank

  4.3†   

Warrant to Purchase Stock issued December 22, 2005 to Gold Hill Venture Lending 03, LP

  4.4*   

Amended and Restated Investor Rights Agreement, dated April 2, 2008, by and among the Company and the investors party thereto

  5.1   

Opinion of Goodwin Procter LLP

10.1#†   

2003 Stock Plan, as amended, including addendums and sub-plans

10.2#†   

Forms of agreements under the 2003 Stock Plan, as amended

10.3#   

2011 Stock Option and Incentive Plan and form agreements thereunder (to be effective upon completion of this offering)

10.4   

Form of Amended and Restated Indemnification Agreement

10.5#†   

Offer Letter, dated August 16, 2010, between the Company and Shlomo Kramer

10.6#   

Offer Letter, dated September 29, 2010, between the Company and Terrence J. Schmid

10.7#†   

Offer Letter, dated December 19, 2007, between the Company and Ralph Pisani

10.8#†   

Offer Letter, dated May 9, 2006, between the Company and Jason Forget

10.9#†   

Stock Purchase Agreement, dated September 30, 2010, between the Company and Shlomo Kramer (1,265,730 shares of common stock purchased)

10.10#†   

Stock Purchase Agreement, dated September 30, 2010, between the Company and Shlomo Kramer (421,909 shares of common stock purchased)

10.11+†   

OEM Agreement, dated September 9, 2009, between the Company, Imperva, Ltd. and American Portwell Technology Inc.

10.12+†   

OEM Agreement, dated September 9, 2009, between the Company, Imperva, Ltd. and Dan-El Technologies, Ltd.

10.13†   

Lease Agreement, dated February 6, 2008, between the Company and Westport Office Park, LLC

10.14†   

First Amendment to Lease, dated February 12, 2010, between the Company and Westport Office Park, LLC

10.15†   

Series A Preferred Stock Purchase Agreement, dated November 5, 2009, between Incapsula, Inc. and the Company

10.16†   

Series A and Series A-1 Preferred Stock Purchase Agreement, dated March 9, 2010, by and among Incapsula, Inc. and the investors party thereto

10.17†   

Amended and Restated Investors’ Rights Agreement, dated March 9, 2010, by and among Incapsula, Inc. and the investors party thereto

10.18†   

Amendment No. 1 to the Series A and Series A-1 Preferred Stock Purchase Agreement, dated December 31, 2010, by and among Incapsula, Inc. and the investors party thereto


Table of Contents

Number

  

Description

10.19   

2011 Employee Stock Purchase Plan (to be effective upon completion of this offering)

10.20#   

Offer Letter, dated July 14, 2011, between the Company and David N. Strohm

10.21#   

Offer Letter, dated July 20, 2011, between the Company and Frank Slootman

10.22   

Amendment No. 2 to the Series A and Series A-1 Preferred Stock Purchase Agreement, dated October 24, 2011, by and among Incapsula, Inc. and the investors party thereto

10.23#   

2011 Imperva Compensation Plan for Ralph Pisani

10.24#   

2011 Imperva Compensation Plan for Jason Forget

21.1†   

Subsidiaries of Imperva, Inc.

23.1   

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm

23.2   

Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, Independent Registered Public Accounting Firm

23.3   

Consent of Goodwin Procter LLP (included in Exhibit 5.1)

24.1†   

Power of Attorney (included in page II-5)

24.2†   

Power of Attorney for Frank Slootman

24.3†   

Power of Attorney for David Strohm

 

  * To be filed by amendment
  + Portions of the exhibit have been omitted pursuant to a request for confidential treatment
  # Indicates management contract or compensatory plan, contract or agreement
  Previously filed

EXHIBIT 3.3

IMPERVA, INC.

RESTATED CERTIFICATE OF INCORPORATION

Imperva, Inc., a Delaware corporation, hereby certifies as follows:

1. The name of the corporation is Imperva, Inc. The date of filing its original Certificate of Incorporation with the Secretary of State was April 10, 2002, under the name WebCohort Inc.

2. The Restated Certificate of Incorporation of the corporation attached hereto as Exhibit “1” , which is incorporated herein by this reference, and which restates, integrates and further amends the provisions of the Restated Certificate of Incorporation of the corporation as previously amended or supplemented, has been duly adopted by the corporation’s Board of Directors and by the stockholders in accordance with Sections 242 and 245 of the Delaware General Corporation Law, with the approval of the corporation’s stockholders having been given by written consent without a meeting in accordance with Section 228 of the Delaware General Corporation Law.

IN WITNESS WHEREOF, the corporation has caused this Restated Certificate of Incorporation to be signed by its duly authorized officer and the foregoing facts stated herein are true and correct.

 

Dated:         IMPERVA, INC.
      By:    
      Name:    
      Title:    


EXHIBIT “1”

IMPERVA, INC.

RESTATED CERTIFICATE OF INCORPORATION

ARTICLE I: NAME

The name of the corporation is Imperva, Inc.

ARTICLE II: AGENT FOR SERVICE OF PROCESS

The address of the corporation’s registered office in the State of Delaware is c/o 3500 South Dupont Highway in the City of Dover, County of Kent 19901. The name of the registered agent of the corporation at that address is Incorporating Services, Ltd.

ARTICLE III: PURPOSE

The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the “ DGCL ”).

ARTICLE IV: AUTHORIZED STOCK

1. Total Authorized . The total number of shares of all classes of stock that the corporation has authority to issue is One Hundred Fifty Million (150,000,000) shares, consisting of two classes: One Hundred Forty-Five Million (145,000,000) shares of common stock, $0.0001 par value per share (the “ Common Stock ”), and Five Million (5,000,000) shares of undesignated preferred stock, $0.0001 par value per share (the “ Preferred Stock ”).

2. Designation of Additional Shares

2.1. The Board of Directors is authorized, subject to any limitations prescribed by the law of the State of Delaware, to provide for the issuance of the shares of Preferred Stock in one or more series, and, by filing a Certificate of Designation pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, to fix the designation, powers, preferences and relative, participating, optional or other rights, if any, of the shares of each such series and any qualifications, limitations or restrictions thereof, and to increase (but not above the total number of authorized shares of the class) or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding). The number of authorized shares of Preferred Stock may also be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of at least seventy-five percent (75%) of the voting power of all the then-outstanding shares of capital stock of the corporation entitled to vote thereon, without a

 

1


vote of the holders of the Preferred Stock, unless a vote of any such holders is required pursuant to the terms of any certificate or certificates establishing a series of Preferred Stock.

2.2 Except as otherwise expressly provided in any Certificate of Designation designating any series of Preferred Stock pursuant to the foregoing provisions of this Article IV, any new series of Preferred Stock may be designated, fixed and determined as provided herein by the Board of Directors without approval of the holders of Common Stock or the holders of Preferred Stock, or any series thereof, and any such new series may have powers, preferences and rights, including, without limitation, voting rights, dividend rights, liquidation rights, redemption rights and conversion rights, senior to, junior to or pari passu with the rights of the Common Stock, the Preferred Stock, or any future class or series of Preferred Stock or Common Stock.

2.3 Each outstanding share of Common Stock will entitle the holder thereof to one (1) vote on each matter properly submitted to the stockholders of the corporation for their vote; provided , however , that, except as otherwise required by law, holders of Common Stock will not be entitled to vote on any amendment to this Certificate of Incorporation (including any Certificate of Designation relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon pursuant to this Certificate of Incorporation (including any Certificate of Designation relating to any series of Preferred Stock).

ARTICLE V: AMENDMENT OF BYLAWS

The Board of Directors of the corporation will have the power to adopt, amend or repeal the Bylaws of the corporation. Any adoption, amendment or repeal of the Bylaws of the corporation by the Board of Directors will require the approval of a majority of the Whole Board. For purposes of this Certificate of Incorporation, the term “ Whole Board ” will mean the total number of authorized directors whether or not there exist any vacancies in previously authorized directorships. The stockholders also will have power to adopt, amend or repeal the Bylaws of the corporation; provided , however , that in addition to any vote of the holders of any class or series of stock of the corporation required by law or by this Certificate of Incorporation (including any Preferred Stock issued pursuant to a Certificate of Designation), the affirmative vote of the holders of at least seventy-five percent (75%) of the voting power of all of the then-outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, will be required to adopt, amend or repeal any provision of the Bylaws of the corporation; provided , further , that if the Board of Directors recommends that stockholders approve such amendment or repeal at such meeting of stockholders, such amendment or repeal shall require only the affirmative vote of the majority of the outstanding shares of capital stock entitled to vote on such amendment or repeal, voting together as a single class.

 

2


ARTICLE VI: MATTERS RELATING TO THE BOARD OF DIRECTORS

1. Director Powers . The conduct of the affairs of the corporation will be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by this Certificate of Incorporation or the Bylaws of the corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the corporation.

2. Number of Directors . Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the number of directors will be fixed from time to time exclusively by resolution adopted by a majority of the Whole Board.

3. Classified Board . Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors will be divided, with respect to the time for which they severally hold office, into three classes designated as Class I, Class II and Class III, respectively (the “ Classified Board ”). The Board of Directors may assign members of the Board of Directors already in office to the Classified Board, which assignments will become effective at the same time the Classified Board becomes effective. Directors will be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors, with the number of directors in each class to be divided as nearly equal as reasonably possible. The initial term of office of the Class I directors will expire at the corporation’s first annual meeting of stockholders following the closing of the corporation’s initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock to the public (the “ Initial Public Offering ”), the initial term of office of the Class II directors will expire at the corporation’s second annual meeting of stockholders following the closing of the Initial Public Offering, and the initial term of office of the Class III directors will expire at the corporation’s third annual meeting of stockholders following the closing of the Initial Public Offering. At each annual meeting of stockholders following the closing of the Initial Public Offering, directors elected to succeed those directors of the class whose terms then expire will be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. Each director will hold office until his or her successor will have been duly elected and qualified, or until such director’s earlier death, resignation or removal.

4. Term and Removal . Each director will hold office until such director’s successor is elected and qualified, or until such director’s earlier death, resignation or removal. Any director may resign at any time upon notice to the corporation given in writing or by any electronic transmission permitted in the corporation’s bylaws. Subject to the rights of the holders of any series of Preferred Stock, no director (including persons elected by the Board of Directors to fill vacancies in the Board of Directors) may be removed except for cause and only by the affirmative vote of the holders of at least seventy-five percent (75%) of the voting power of the then-outstanding shares of capital stock of the corporation then entitled to vote at an election of directors voting together as a single class. No decrease in the authorized number of directors constituting the Board of Directors will shorten the term of any incumbent director.

 

3


5. Board Vacancies . Subject to the rights of the holders of any series of Preferred Stock, any vacancy occurring in the Board of Directors for any cause, and any newly created directorship resulting from any increase in the authorized number of directors, will, unless (a) the Board of Directors determines by resolution that any such vacancies or newly created directorships will be filled by the stockholders or (b) as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and not by the stockholders. Any director elected in accordance with the preceding sentence will hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which the director has been assigned expires or until such director’s successor will have been duly elected and qualified.

6. Vote by Ballot . Election of directors need not be by written ballot unless the Bylaws of the corporation will so provide.

ARTICLE VII: DIRECTOR LIABILITY

1. Limitation of Liability . To the fullest extent permitted by law, no director of the corporation will be personally liable for monetary damages for breach of fiduciary duty as a director. Without limiting the effect of the preceding sentence, if the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the corporation will be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended.

2. Change in Rights . Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article VII, will eliminate, reduce or otherwise adversely affect any limitation on the personal liability of a director of the corporation existing at the time of such amendment, repeal or adoption of such an inconsistent provision.

ARTICLE VIII: MATTERS RELATING TO STOCKHOLDERS

1. No Action by Written Consent of Stockholders . Subject to the rights, if any, of any series of Preferred Stock, no action will be taken by the stockholders of the corporation except at a duly called annual or special meeting of stockholders and no action will be taken by the stockholders by written consent.

2. Special Meeting of Stockholders . Except as otherwise required by statute and subject to the rights, if any, of any series of Preferred Stock, special meetings of the stockholders of the corporation may be called only by the Chairperson of the Board, the Lead Independent Director (if any), the Chief Executive Officer, the President or a majority of the Board of Directors. Special meetings of stockholders may not be called by any other person or persons.

3. Advance Notice of Stockholder Nominations and Business Transacted at Special Meetings . Advance notice of stockholder nominations for the election of directors of the corporation and of business to be brought by stockholders before any meeting of stockholders of the corporation will be given in the manner provided in the Bylaws of the corporation. Business transacted at special meetings of stockholders will be confined to the purpose or purposes stated in the notice of meeting.

 

4


ARTICLE IX: CREDITOR AND STOCKHOLDER COMPROMISES

Whenever a compromise or arrangement is proposed between the corporation and its creditors or any class of them and/or between the corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the corporation under the provisions of §291 of Title 8 of the Delaware General Corporation Law or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under §279 of Title 8 of the Delaware General Corporation Law order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization will, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the corporation, as the case may be, and also on the corporation.

ARTICLE X: AMENDMENT OF CERTIFICATE OF INCORPORATION

The corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation; provided , however , that, notwithstanding any other provision of this Certificate of Incorporation or any provision of law that might otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any class or series of the stock of the corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least seventy-five percent (75%) of the voting power of all of the then-outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, will be required to amend or repeal this Article X or Article V, Article VI, Article VII or Article VIII.

* * * * * * * * * * *

 

5

EXHIBIT 3.6

AMENDED AND RESTATED BYLAWS

OF

IMPERVA, INC.

(a Delaware corporation)

As Effective              , 2011

ARTICLE I

STOCKHOLDERS

Section 1.1 : Annual Meetings . If required by applicable law, an annual meeting of stockholders shall be held for the election of directors at such date and time as the Board of Directors of the Corporation (the “ Board ”) shall each year fix. The meeting may be held either at a place, within or without the State of Delaware as permitted by the General Corporation Law of the State of Delaware (the “ DGCL ”), or by means of remote communication as the Board in its sole discretion may determine. Any proper business may be transacted at the annual meeting.

Section 1.2 : Special Meetings . Subject to the rights, if any, of the holders of preferred stock, special meetings of stockholders for any purpose or purposes may be called at any time by the Chairperson of the Board, the Lead Independent Director (as defined below), the Chief Executive Officer, the President or by a majority of the “ Whole Board ,” which shall mean the total number of authorized directors, whether or not there exist any vacancies in previously authorized directorships, but special meetings may not be called by any other person or persons. If the special meeting of stockholders is to be called at the request of any such enumerated person or persons other than by a majority of the Whole Board at a meeting, then such person or persons shall request such meeting by delivering a written request to call such meeting to each member of the Board, and the Board shall then determine the time and date of such special meeting, which shall be held not more than one hundred twenty (120) nor less than thirty-five (35) days after the written request to call such special meeting was delivered to each member of the Board. The special meeting may be held either at a place, within or without the State of Delaware, or by means of remote communication as the Board in its sole discretion may determine. Only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders.

Section 1.3 : Notice of Meetings . Notice of all meetings of stockholders shall be given in writing or by electronic transmission in the manner provided by law (including, without limitation, as set forth in Section 7.1(b) of these Amended and Restated Bylaws) stating the date, time and place, if any, of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by applicable law or the Restated Certificate of Incorporation of the Corporation, as amended (the “ Certificate of Incorporation ”), such notice shall be given not less than ten (10), nor more than sixty (60), days before the date of the meeting to each stockholder of record entitled to vote at such meeting.


Section 1.4 : Adjournments . When any meeting is convened, the chairperson of the meeting shall have the power to adjourn the meeting to another time, date and place (if any). Any meeting of stockholders may adjourn from time to time, and notice need not be given of any such adjourned meeting if the time, date and place (if any) thereof and the means of remote communications (if any) by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken.; provided , however , that if the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, then a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At the adjourned meeting, the Corporation may transact any business that might have been transacted at the original meeting. To the fullest extent permitted by law, the Board may postpone, reschedule or cancel any previously scheduled special or annual meeting of stockholders before it is to be held, regardless of whether any notice or public disclosure with respect to any such meeting has been sent or made pursuant to Section 1.3 hereof or otherwise.

Section 1.5 : Quorum . At each meeting of stockholders, the holders of a majority of the voting power of the shares of stock entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business, unless otherwise required by applicable law or the Certificate of Incorporation. If a quorum shall fail to attend any meeting, the chairperson of the meeting may adjourn the meeting. Shares of the Corporation’s stock belonging to the Corporation (or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation are held, directly or indirectly, by the Corporation), shall neither be entitled to vote nor be counted for quorum purposes; provided , however , that the foregoing shall not limit the right of the Corporation or any other corporation to vote any shares of the Corporation’s stock held by it in a fiduciary capacity and to count such shares for purposes of determining a quorum. The stockholders present at a duly constituted meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.

Section 1.6 : Organization . Meetings of stockholders shall be presided over by such person as the Board may designate, or, in the absence of such a person, the Chief Executive Officer or, in the absence of the Chief Executive Officer, the President, the Chairperson of the Board or the most senior officer of the Corporation present, in that order of priority. Such person shall be chairperson of the meeting and, subject to Section 1.11 hereof, shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her to be in order. The Secretary of the Corporation shall act as secretary of the meeting, but in such person’s absence the chairperson of the meeting may appoint any person to act as secretary of the meeting.

Section 1.7 : Voting; Proxies . Unless otherwise provided by law or the Certificate of Incorporation, and subject to the provisions of Section 1.8 of these Amended and Restated Bylaws, each stockholder shall be entitled to one (1) vote for each share of stock held by such stockholder which has voting power upon the matter in question. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy. Voting at meetings of stockholders need not be by written ballot. Such a proxy may be prepared, transmitted and delivered in any manner permitted by applicable law in accordance with the procedures established for the meeting. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Unless otherwise provided by applicable law, the rules or regulations of any stock exchange applicable to the Corporation the Certificate of Incorporation or these Amended and Restated Bylaws, every matter other than the election of directors shall be decided by the affirmative vote of the holders of a majority of the voting power of the shares of stock entitled to vote thereon that are present in person or represented by proxy at the meeting and are voted for or against the matter.

 

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Section 1.8 : Fixing Date for Determination of Stockholders of Record .

(a) In order that the Corporation may determine the stockholders entitled to notice of at any meeting of stockholders or any adjournment thereof, unless otherwise required by law, the Board may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board and which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If the Board so fixes a date, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed by the Board, then the record date shall be as provided by applicable law. To the fullest extent permitted by law, a determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided , however , that the Board may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting, and in such case shall also fix as the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote in accordance herewith at the adjourned meeting.

(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix a record date, which shall not be more than sixty (60) days prior to such other action. If no such record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto.

Section 1.9 : List of Stockholders Entitled to Vote . A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either on a reasonably accessible electronic network as permitted by law (provided that the information required to gain access to the list is provided with the notice of the meeting) or during ordinary business hours at the principal place of business of the Corporation. If the meeting is held at a location where stockholders may attend in person, the list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present at the meeting. If the meeting is held solely by means of remote communication, then the list shall be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access the list shall be provided with the notice of the meeting.

Section 1.10 : Inspectors of Elections .

(a) Applicability . Unless otherwise required by the Certificate of Incorporation or required by the DGCL, the following provisions of this Section 1.10 shall apply only if and when the Corporation has a class of voting stock that is: (i) listed on a national securities exchange; (ii) authorized for quotation on an automated interdealer quotation system of a registered national securities association; or (iii) held of record by more than two thousand (2,000) stockholders. In all other cases, observance of the provisions of this Section 1.10 shall be optional, and at the discretion of the Board.

(b) Appointment . The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors of election to act at the meeting or any adjournment thereof and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any

 

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inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting.

(c) Inspector’s Oath . Each inspector of election, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector’s ability.

(d) Duties of Inspectors . At a meeting of stockholders, the inspectors of election shall (i) ascertain the number of shares outstanding and the voting power of each share, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period of time a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors.

(e) Opening and Closing of Polls . The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced by the chairperson of the meeting at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise.

(f) Determinations . In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in connection with proxies in accordance with Section 211(e) or Section 212(c)(2) of the DGCL, or any information provided pursuant to Section 211(a)(2)(B)(i) or (iii) of the DGCL, ballots and the regular books and records of the Corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification of their determinations pursuant to this Section 1.10 shall specify the precise information considered by them, including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors’ belief that such information is accurate and reliable.

Section 1.11 : Notice of Stockholder Business; Nominations

(a) Annual Meeting of Stockholders .

(i) Nominations of persons for election to the Board and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders only (A) pursuant to the Corporation’s notice of such meeting (or any supplement thereto), (B) by or at the direction of the Board or any committee thereof, or (C) by any stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this Section 1.11, who is entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 1.11. For the avoidance of doubt, the foregoing clause (C) shall be the exclusive means for a stockholder to bring nominations or business properly before an annual meeting (other than matters properly brought under Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)), and such stockholder must comply with the notice and other procedures set forth in this Section 1.11(a) to bring such nominations or other business properly before an annual meeting.

 

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(ii) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (C) of Section 1.11(a)(i):

(A) the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation, and have provided any updates or supplements to such notice at the times and in the forms required by this Section 1.11,

(B) such other business must otherwise be a proper matter for stockholder action,

(C) if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, has provided the Corporation with a Solicitation Notice, as that term is defined in this Section, such stockholder or beneficial owner must, in the case of a proposal, have delivered a proxy statement and form of proxy to holders of at least the percentage of the Corporation’s voting shares required under applicable law to carry any such proposal, or, in the case of a nomination or nominations, have delivered a proxy statement and form of proxy to holders of a percentage of the Corporation’s voting shares reasonably believed by such stockholder or beneficial holder to be sufficient to elect the nominee or nominees proposed to be nominated by such stockholder, and must, in either case, have included in such materials the Solicitation Notice (as defined below); and

(D) if no Solicitation Notice relating thereto has been timely provided pursuant to this Section, the stockholder or beneficial owner proposing such business or nomination must not have solicited a number of proxies sufficient to have required the delivery of such a Solicitation Notice under this Section.

To be timely, a stockholder’s notice described above in Section 1.11(a)(i)(C) must be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the seventy-fifth (75th) day nor earlier than the close of business on the one hundred and fifth (105th) day prior to the first anniversary of the preceding year’s annual meeting (except in the case of the first annual meeting of stockholders following the closing of the corporation’s initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock to the public, for which such notice shall be timely if delivered in the same time period as if such meeting were a special meeting governed by Section 1.11(b)); provided , however , that in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date or if no annual meeting was held in the preceding year, notice by the stockholder to be timely must be so delivered no earlier than the close of business on the one hundred and fifth (105th) day prior to such annual meeting and not later than the close of business on the later of the seventy-fifth (75th) day prior to such annual meeting or the close of business on the tenth (10th) day following the day on which Public Announcement (as defined below) of the date of such annual meeting is first made by the Corporation. In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above. Such stockholder’s notice shall set forth:

(A) as to each person whom the stockholder proposes to nominate for election or re-election as a director (I) the name, age, business address and residence address of such person, (II) the class, series and number of any shares of stock of the Corporation that are beneficially owned or owned of record by such person or any Associated Person (as defined below), (III) the date or dates such shares were acquired and the investment intent of such acquisition, and (IV) all other information relating to such person that would be required to be disclosed in solicitations of proxies for election of directors in an election contest (even if an election contest is not involved), or would be otherwise required, in each case

 

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pursuant to Regulation 14A (or any successor provision) under the Exchange Act and the rules thereunder (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected);

(B) as to any other business that the stockholder or beneficial owner (as applicable) proposes to bring before the annual meeting, a brief description of the business desired to be brought before the annual meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the Amended and Restated Bylaws of the Corporation, the language of the proposed amendment, the reasons for conducting such business at the annual meeting and any material interest in such business of the stockholder or beneficial owner and any Associated Person on whose behalf the proposal is made, individually or in the aggregate, including any anticipated benefit to the stockholder, beneficial owner or any Associated Person therefrom; and

(C) as to the stockholder giving the stockholder notice, any beneficial owner on whose behalf the nomination or proposal is made, and any Associated Person (I) the name and address of such stockholder or beneficial owner and any Associated Person, as they appear on the Corporation’s stock ledger, and the current name and address, if different, from the Corporation’s stock ledger, (II) the class, series and number of shares of stock of the Corporation that are owned beneficially and of record by the stockholder or beneficial owner and any Associated Person, (III) the nominee holder for, and the number of, shares of stock of the Corporation, by class and series, that are owned beneficially but not of record by the stockholder or beneficial owner and any Associated Person, (IV) whether and the extent to which any derivative interest in the Corporation’s equity securities (including without limitation any cash-settled equity swap, total return swap or similar derivative arrangement) is held by or for the benefit of such stockholder or beneficial owner or any Associated Person, including without limitation whether and the extent to which any ongoing hedging or other transaction or series of transactions has been entered into by or on behalf of, or any other agreement, arrangement or understanding (including without limitation any short position or any borrowing or lending of shares) has been made, the effect or intent of which is to mitigate loss to or manage risk or benefit of share price changes for, or to increase or decrease the voting power of, the stockholder or any Associated Person with respect to any share of stock of the Corporation (subsections (II), (III) and (IV), collectively, the “ Securityholdings ”), including in each case specifying (aa) to the extent known by such stockholder or beneficial owner or any Associated Person on the date of such stockholder notice, the name and address of any other stockholder or holder of other Securityholdings supporting the proposed nominee(s) for election or re-election as a director or the proposal of other business (such other stockholder or holder, an “ Aligned Person ”), (bb) to the extent known by such stockholder or beneficial owner or any Associated Person, whether such stockholder, beneficial owner, Aligned Person or any Associated Person of any of the foregoing individually or collectively intends to acquire, directly or indirectly, capital stock representing a majority of the voting power of the capital stock of the Corporation or the power to elect or nominate a majority of the Board, and (cc) whether the stockholder or beneficial owner intends to deliver (or cause to be delivered) a proxy statement and form of proxy to holders of, in the case of a proposal, at least the percentage of the Corporation’s voting shares required under applicable law to carry the proposal or, in the case of a nomination or nominations, a sufficient number of holders of the Corporation’s voting shares to elect such nominee or nominees (an affirmative statement of such intent being a “ Solicitation Notice ”).

In addition, the stockholder giving the stockholder notice or any beneficial owner on whose behalf the stockholder notice is given or the nomination or proposal is made, as applicable, must give notice to the Secretary of the Corporation at the principal executive offices of the Corporation of any change, within two (2) Business Days thereof, in the Securityholdings of such stockholder or beneficial owner and any Associated Person occurring between the date of delivery of the stockholder notice and the closing of the

 

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polls at the annual meeting (each a “ Securityholdings Update ”). Any such Securityholdings Update shall specify the nature, amount and date of the change, and to the extent known, the counterparty thereto.

(iii) Notwithstanding anything in Section 1.7 or any other provision of these Amended and Restated Bylaws to the contrary, to the fullest extent permitted by law, any failure by the stockholder or beneficial owner on whose behalf the Stockholder Notice is given or nomination proposal is made, as applicable, to provide any Securityholdings Update shall preclude the stockholder or beneficial owner and any Associated Person from voting those Securityholdings at the annual meeting for which a Securityholdings Update has not been timely provided as required by this subsection, and the chairman, secretary or inspector of elections of the meeting may disallow and disregard any vote cast with respect to any nomination or proposal made by such stockholder, beneficial owner or Associated Person at such meeting.

(iv) Notwithstanding anything in the second sentence of Section 1.11(a)(ii) to the contrary, in the event that the number of directors to be elected to the Board at the annual meeting is increased effective after the time period for which nominations would otherwise be due under Section 1.11(a)(ii) and there is no Public Announcement (as defined below) by the Corporation naming all of the nominees for director or specifying the size of the increased Board at least seventy-five (75) days prior to the first anniversary of the preceding year’s annual meeting (or, if the annual meeting is held more than thirty (30) days before or sixty (60) days after such anniversary date, at least seventy five (75) days prior to such annual meeting), a stockholder’s notice required by this Section 1.11 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation at the principal executive office of the Corporation not later than the close of business on the tenth (10th) day following the day on which such Public Announcement (as defined below) is first made by the Corporation.

(b) Special Meetings of Stockholders . Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of such meeting. Nominations of persons for election to the Board may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of such meeting (i) by or at the direction of the Board or any committee thereof or (ii) provided that the Board has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice of the special meeting, who shall be entitled to vote at the meeting and upon such election and who complies with the notice procedures set forth in this Section 1.11. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board, any such stockholder entitled to vote in such election of directors may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by Section 1.11(a)(ii) shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation no earlier than the close of business on the one hundred fifth (105th) day prior to such special meeting and not later than the close of business on the later of the seventy fifth (75th) day prior to such special meeting or the tenth (10th) day following the day on which Public Announcement (as defined below) is first made of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting. In no event shall the public announcement of an adjournment or postponement of a special meeting commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above.

(c) General .

(i) If information submitted pursuant to this Section 1.11 by any stockholder or beneficial owner proposing a nominee for election as a director or any proposal for other business at a

 

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meeting of stockholders is inaccurate to any material extent, such information may be deemed not to have been provided in accordance with this Section 1.11. Upon written request by the Secretary, the Board or any committee thereof, to any stockholder or beneficial owner proposing a nominee for election or re-election as a director or any proposal for other business at a meeting of stockholders shall provide, within seven (7) Business Days of delivery of such request (or such other period as may be specified in such request), written verification, satisfactory in the discretion of the Board, any committee thereof or any authorized officer of the Corporation, to demonstrate the accuracy of any information submitted by the stockholder pursuant to this Section 1.11. If a stockholder or beneficial owner fails to provide such written verification within such period, the information as to which written verification was requested may be deemed not to have been provided in accordance with this Section 1.11.

(ii) Except as otherwise expressly provided in any applicable rule or regulation under the Exchange Act, only such persons who are nominated in accordance with the procedures set forth in this Section 1.11 shall be eligible to be elected to the Board at an annual or special meeting of stockholders and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.11. Except as otherwise provided by law or these Amended and Restated Bylaws, the chairperson of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 1.11 and, if any proposed nomination or business is not in compliance herewith, to declare that such defective proposal or nomination shall be disregarded.

(iii) For purposes of this Section 1.11, the term “ Associated Person ” shall mean with respect to any subject stockholder or other person (including any proposed nominee) (a) any person controlling, directly or indirectly, or acting in concert with, such stockholder or other person, (b) any beneficial owner of shares of stock of the Corporation owned of record or beneficially by such stockholder or other person, (c) any person controlling, controlled by or under common control with such Associated Person, and (d) any associate (as defined in Rule 405 under the Securities Act of 1933, as amended), of such stockholder or other person; the term “ Business Day ” shall mean shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of California are authorized or obligated by law or executive order to close; and the term “ Public Announcement ” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

(vi) Notwithstanding the foregoing provisions of this Section 1.11, a stockholder also shall comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this Section 1.11 shall be deemed to affect any rights of (i) stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act and, to the extent required by such rule, have such proposals considered and voted on at an annual meeting or (ii) holders of any series of preferred stock to elect directors pursuant to any applicable provisions of the Certificate of Incorporation.

ARTICLE II

BOARD OF DIRECTORS

Section 2.1 : Number; Qualifications . The Board shall consist of one or more members. The number of directors, unless otherwise required by law or provided in the Certificate of Incorporation, shall be fixed from time to time by resolution of a majority of the Whole Board. No decrease in the

 

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authorized number of directors constituting the Board shall shorten the term of any incumbent director. Directors need not be stockholders of the Corporation.

Section 2.2 : Election; Resignation; Removal; Vacancies .

(a) The Board shall initially consist of the person or persons then in office at the time these Amended and Restated Bylaws become effective.

(b) Vacancies in the Board shall be filled in the manner provided in the Certificate of Incorporation.

(c) Any director may resign at any time upon notice to the Corporation given in writing or by any electronic transmission permitted by these Amended and Restated Bylaws. Directors may be removed from office only in the manner provided in the Certificate of Incorporation.

(d) Subject to the Certificate of Incorporation, any vacancy occurring in the Board, and any newly created directorship resulting from any increase in the authorized number of directors, shall, unless (i) the Board determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders or (ii) as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and not by the stockholders. Any director elected in accordance with the preceding sentence shall, if elected to fill a vacancy not created by a newly created directorship, be elected to a class of directors in which such vacancy exists and hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class of directors to which the director has been assigned expires or until such director’s successor shall have been duly elected and qualified or until such director’s successor’s earlier death, resignation or removal.

Section 2.3 : Regular Meetings . Regular meetings of the Board may be held at such places, within or without the State of Delaware, and at such times as the Board may from time to time determine. Notice of regular meetings need not be given if the date, times and places thereof are fixed by resolution of the Board.

Section 2.4 : Special Meetings . Special meetings of the Board may be called by the Chairperson of the Board, the Lead Independent Director, the Chief Executive Officer or the President or a majority of the members of the Board then in office and may be held at any time, date or place, within or without the State of Delaware, as the person or persons calling the meeting shall fix. Notice of the time, date and place of such meeting shall be given, orally, in writing or by electronic transmission (including electronic mail), by the person or persons calling the meeting to all directors at least four (4) days before the meeting if the notice is mailed, or at least twenty-four (24) hours before the meeting if such notice is given by telephone, hand delivery, telegram, telex, mailgram, facsimile, electronic mail or other means of electronic transmission. Unless otherwise indicated in the notice, any and all business may be transacted at a special meeting.

Section 2.5 : Remote Meetings Permitted . Members of the Board, or any committee of the Board, may participate in a meeting of the Board or such committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to conference telephone or other communications equipment shall constitute presence in person at such meeting.

Section 2.6 : Quorum; Vote Required for Action . At all meetings of the Board a majority of the Whole Board shall constitute a quorum for the transaction of business. If a quorum shall fail to attend

 

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any meeting, a majority of those present may adjourn the meeting to another place, date or time without further notice thereof. Except as otherwise provided herein or in the Certificate of Incorporation, or required by law, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board.

Section 2.7 : Organization . Meetings of the Board shall be presided over by the Chairperson of the Board, or, in the absence of the Chairperson of the Board, the Lead Independent Director, or in the absence of the Lead Independent Director, the Chief Executive Officer, or, in the absence of the Chief Executive Officer, the President, or, in the absence of the President, by a chairperson chosen by the Board at the meeting. The Secretary of the Company shall act as secretary of the meeting, but in such person’s absence the chairperson of the meeting may appoint any person to act as secretary of the meeting.

Section 2.8 : Written Action by Directors . Any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing, or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee, respectively, in the minute books of the Corporation. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

Section 2.9 : Powers . The Board may, except as otherwise required by law or the Certificate of Incorporation, exercise all such powers and manage and direct all such acts and things as may be exercised or done by the Corporation.

Section 2.10 : Compensation of Non-Employee Directors . Non-employee members of the Board, as such, may receive, pursuant to a resolution of the Board, fees and other compensation for their services as directors, including without limitation their services as members of committees of the Board.

ARTICLE III

COMMITTEES

Section 3.1 : Committees . The Board may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting of such committee who are not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in a resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority in reference to the following matters: (a) approving, adopting or recommending to the stockholders any action or matter (other than the elections or removal of members of the Board) expressly required by the DGCL to be submitted to stockholders for approval or (b) adopting, amending or repealing any bylaw of the Corporation.

Section 3.2 : Committee Rules . Unless the Board otherwise provides, each committee designated by the Board may make, alter and repeal rules for the conduct of its business not in conflict with the provisions of this Article III. In the absence of such rules each committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article II of these Amended

 

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and Restated Bylaws. Adequate provision shall be made for notice to members of a committee of all meetings of such committee, and, unless such committee has determined otherwise, all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of the proceedings of such committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

ARTICLE IV

OFFICERS

Section 4.1 : Generally . The officers of the Corporation shall consist of a Chief Executive Officer and/or a President, one or more Vice Presidents, a Secretary, a Treasurer and such other officers, including a Chief Financial Officer, and/or an Assistant Secretary as may from time to time be appointed by the Board. All officers shall be elected by the Board; provided , however , that the Board may empower the Chief Executive Officer of the Corporation to appoint any officer other than the Chairperson of the Board, the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer. Each officer shall hold office until such person’s successor is appointed or until such person’s earlier death, resignation or removal. Any number of offices may be held by the same person. Any officer may resign at any time upon written notice to the Corporation without prejudice to the rights, if any, of the Corporation under any contract to which such officer is a party. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled by the Board.

Section 4.2 : Chief Executive Officer . Subject to the control of the Board and such supervisory powers, if any, as may be given by the Board, the powers and duties of the Chief Executive Officer of the Corporation are:

(a) To act as the general manager and, subject to the control of the Board, to have general supervision, direction and control of the business and affairs of the Corporation;

(b) Subject to Section 1.6, to preside at all meetings of the stockholders;

(c) Subject to Section 1.2, to call special meetings of the stockholders to be held at such times and, subject to the limitations prescribed by law or by these Amended and Restated Bylaws, at such places as he or she shall deem proper; and

(d) To affix the signature of the Corporation to all deeds, conveyances, mortgages, guarantees, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the Board or which, in the judgment of the Chief Executive Officer, should be executed on behalf of the Corporation; to sign certificates for shares of stock of the Corporation; and, subject to the direction of the Board, to have general charge of the property of the Corporation and to supervise and control all officers, agents and employees of the Corporation.

The President shall be the Chief Executive Officer of the Corporation unless the Board shall designate another officer to be the Chief Executive Officer. If there is no President, and the Board has not designated any other officer to be the Chief Executive Officer, then the Chairperson of the Board shall be the Chief Executive Officer.

Section 4.3 : Chairperson of the Board . Subject to the provisions of Section 2.7, the Chairperson of the Board (which may also be referred to as the “ Chairman of the Board ” or

 

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Chairwoman of the Board ,” as applicable) shall have the power to preside at all meetings of the Board and shall have such other powers and duties as provided in these Amended and Restated Bylaws and as the Board may from time to time prescribe.

Section 4.4 : Lead Independent Director . The Board may, in its discretion elect a Lead Independent Director from among its members that are “Independent Directors” (as defined below). He or she shall preside at all meetings of the Board at which the Chairperson of the Board is not present and shall exercise such other powers and duties as may from time to time be assigned to him or her by the Board or as prescribed by these Bylaws. For purposes of these Bylaws, “ Independent Director ” has the meaning ascribed to such term under the rules of The New York Stock Exchange or other stock exchange upon which the Corporation’s common stock is primarily traded.

Section 4.5 : President . Subject to the provisions of these Amended and Restated Bylaws and to the direction of the Board, and subject to the supervisory powers of the Chief Executive Officer (if the Chief Executive Officer is an officer other than the President), and subject to such supervisory powers and authority as may be given by the Board to the Chairperson of the Board, and/or to any other officer, the President shall have the responsibility for the general management and control of the business and affairs of the Corporation and the general supervision and direction of all of the officers, employees and agents of the Corporation (other than the Chief Executive Officer, if the Chief Executive Officer is an officer other than the President) and shall perform all duties and have all powers that are commonly incident to the office of President or that are delegated to the President by the Board.

Section 4.6 : Vice President . Each Vice President shall have all such powers and duties as are commonly incident to the office of Vice President, or that are delegated to him or her by the Board or the Chief Executive Officer. A Vice President may be designated by the Board to perform the duties and exercise the powers of the Chief Executive Officer in the event of the Chief Executive Officer’s absence or disability.

Section 4.7 : Chief Financial Officer . The Chief Financial Officer shall be the Treasurer of the Corporation unless the Board shall have designated another officer as the Treasurer of the Corporation. Subject to the direction of the Board and the Chief Executive Officer, the Chief Financial Officer shall perform all duties and have all powers that are commonly incident to the office of Chief Financial Officer.

Section 4.8 : Treasurer . The Treasurer shall have custody of all monies and securities of the Corporation. The Treasurer shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions. The Treasurer shall also perform such other duties and have such other powers as are commonly incident to the office of Treasurer, or as the Board or the Chief Executive Officer may from time to time prescribe.

Section 4.9 : Secretary (and Assistant Secretary) . The Secretary shall issue or cause to be issued all authorized notices for, and shall keep, or cause to be kept, minutes of all meetings of the stockholders and the Board. The Secretary shall have charge of the corporate minute books and similar records and shall perform such other duties and have such other powers as are commonly incident to the office of Secretary, or as the Board or the Chief Executive Officer may from time to time prescribe. Unless otherwise determined by the Board, the Assistant Secretary should be appointed by the Board and shall have the same duties and powers as the Secretary.

Section 4.10 : Delegation of Authority . The Board may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof.

 

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Section 4.11 : Removal . Any officer of the Corporation shall serve at the pleasure of the Board and may be removed at any time, with or without cause, by the Board; provided , that , if the Board has empowered the Chief Executive Officer to appoint any Vice Presidents of the Corporation, then such Vice Presidents may be removed by the Chief Executive Officer. Such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation.

ARTICLE V

STOCK

Section 5.1 : Certificates; Uncertificated Shares . The shares of capital stock of the Corporation shall be represented by certificates; provided , that , the Board may provide by resolution or resolutions that some or all of any or all classes or series of its stock may be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation (or the transfer agent or registrar, as the case may be). Notwithstanding the adoption of such resolution by the Board, every holder of stock represented by certificates and, upon request, a holder of uncertificated shares shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairperson or Vice-Chairperson of the Board, or the Chief Executive Officer or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by such holder in the Corporation. Any or all of the signatures on the certificate may be a facsimile. In the case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue.

Section 5.2 : Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates . The Corporation may issue a new certificate of stock, or uncertificated shares, in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owner’s legal representative, to agree to indemnify the Corporation and/or to give the Corporation a bond sufficient to indemnify it, against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate.

Section 5.3 : Other Regulations . The issue, transfer, conversion and registration of stock certificates and uncertificated securities shall be governed by such other procedures as the Board may establish or its transfer agent may require.

ARTICLE VI

INDEMNIFICATION

Section 6.1 : Indemnification of Executive Officers and Directors . Each person who was or is made a party to, or is threatened to be made a party to, or is involved in any threatened, pending or completed action, suit or other proceeding, whether civil, criminal, administrative, investigative, legislative or any other type whatsoever, preliminary, informal or formal, including any arbitration or other alternative dispute resolution and including any appeal of any of the foregoing (a “ Proceeding ”), by reason of the fact that such person (or a person of whom such person is the legal representative), is or was a member of the Board or executive officer of the Corporation or is or was serving at the request of the Corporation as a member of the board of directors or executive officer of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit

 

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plans (for purposes of this Article VI, an “ Indemnitee ”), shall be indemnified and held harmless by the Corporation to the fullest extent permitted by applicable law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expenses, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes and penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such Indemnitee in connection therewith, provided such Indemnitee acted in good faith and in a manner that the Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or Proceeding, had no reasonable cause to believe the Indemnitee’s conduct was unlawful. Such indemnification shall continue as to an Indemnitee who has ceased to be a director or executive officer and shall inure to the benefit of such Indemnitees’ heirs, executors and administrators. Notwithstanding the foregoing, except as otherwise provided in Section 6.5.1, the Corporation shall indemnify any such Indemnitee seeking indemnity in connection with a Proceeding (or part thereof) initiated by such Indemnitee only if such Proceeding (or part thereof) was authorized by the Board.

Section 6.2 : Advance of Expenses . The Corporation shall pay all expenses (including attorneys’ fees) incurred by such an Indemnitee in defending any such Proceeding as they are incurred in advance of its final disposition; provided , however , that (a) if the DGCL then so requires, the payment of such expenses incurred by such an Indemnitee in advance of the final disposition of such Proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such Indemnitee, to repay all amounts so advanced if it should be determined ultimately by final judicial decision from which there is no appeal that such Indemnitee is not entitled to be indemnified under this Article VI or otherwise; and (b) the Corporation shall not be required to advance any expenses to a person against whom the Corporation directly brings a claim, in a Proceeding, alleging that such person has breached such person’s duty of loyalty to the Corporation, committed an act or omission not in good faith or that involves intentional misconduct or a knowing violation of law, or derived an improper personal benefit from a transaction.

Section 6.3 : Non-Exclusivity of Rights. The rights conferred on any person in this Article VI shall not be exclusive of any other right that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote or consent of stockholders or disinterested directors, or otherwise. Additionally, nothing in this Article VI shall limit the ability of the Corporation, in its discretion, to indemnify or advance expenses to persons whom the Corporation is not obligated to indemnify or advance expenses pursuant to this Article VI.

Section 6.4 : Indemnification Contracts . The Board is authorized to cause the Corporation to enter into indemnification contracts with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing indemnification or advancement rights to such person. Such rights may be greater than those provided in this Article VI.

Section 6.5: Right of Indemnitee to Bring Suit . The following shall apply to the extent not in conflict with any applicable indemnification contract provided for in Section 6.4 above.

6.5.1 Right to Bring Suit . If a claim under Section 6.1 or 6.2 of this Article VI is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the Indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by

 

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the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (a) any suit brought by the Indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the Indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (b) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the Indemnitee has not met any applicable standard for indemnification set forth in applicable law.

6.5.2 Effect of Determination . Neither the failure of the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable standard of conduct set forth in applicable law, nor an actual determination by the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel or its stockholders) that the Indemnitee has not met such applicable standard of conduct, shall create a presumption that the Indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the Indemnitee, be a defense to such suit.

6.5.3 Burden of Proof . In any suit brought by the Indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the Indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article VI, or otherwise, shall be on the Corporation.

Section 6.6 : Nature of Rights . The rights conferred upon Indemnitees in this Article VI shall be contract rights and such rights shall continue as to an Indemnitee who has ceased to be a director, officer or trustee and shall inure to the benefit of the Indemnitee’s heirs, executors and administrators. Any amendment, repeal or modification of any provision of this Article VI that adversely affects any right of an Indemnitee or an Indemnitee’s successors shall be prospective only, and shall not adversely affect any right or protection conferred on a person pursuant to this Article VI and existing at the time of such amendment, repeal or modification.

ARTICLE VII

NOTICES

Section 7.1 : Notice .

(a) Form and Delivery . Except as otherwise specifically provided in these Amended and Restated Bylaws (including, without limitation, Section 7.1(b) below) or required by law, all notices required to be given pursuant to these Amended and Restated Bylaws shall be in writing and may, (a) in every instance in connection with any delivery to a member of the Board, be effectively given by hand delivery (including use of a delivery service), by depositing such notice in the mail, postage prepaid, or by sending such notice by prepaid telegram, telex, overnight express courier, facsimile, electronic mail or other form of electronic transmission and (b) effectively be delivered to a stockholder when given by hand delivery, by depositing such notice in the mail, postage prepaid or, if specifically consented to by the stockholder as described in Section 7.1(b) of this Article VII by sending such notice by telegram, cablegram, facsimile, electronic mail or other form of electronic transmission. Any such notice shall be addressed to the person to whom notice is to be given at such person’s address as it appears on the records of the Corporation. The notice shall be deemed given (i) in the case of hand delivery, when received by the person to whom notice is to be given or by any person accepting such notice on behalf of such person,

 

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(ii) in the case of delivery by mail, upon deposit in the mail, (iii) in the case of delivery by overnight express courier, when dispatched, and (iv) in the case of delivery via telegram, telex, facsimile, electronic mail or other form of electronic transmission, when dispatched.

(b) Electronic Transmission . Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under any provision of the DGCL, the Certificate of Incorporation or these Amended and Restated Bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given in accordance with Section 232 of the DGCL. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if (i) the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent and (ii) such inability becomes known to the Secretary or an Assistant Secretary of the Corporation or to the transfer agent, or other person responsible for the giving of notice; provided , however , the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. Notice given pursuant to this Section 7.1(b) shall be deemed given: (i) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (iv) if by any other form of electronic transmission, when directed to the stockholder.

(c) Affidavit of Giving Notice . An affidavit of the Secretary or an Assistant Secretary or of the transfer agent or other agent of the Corporation that the notice has been given in writing or by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

Section 7.2 : Waiver of Notice . Whenever notice is required to be given under any provision the DGCL, the Certificate of Incorporation or these Amended and Restated Bylaws, a written waiver of notice, signed by the person entitled to notice, or waiver by electronic transmission by such person, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any waiver of notice.

ARTICLE VIII

INTERESTED DIRECTORS

Section 8.1 : Interested Directors . No contract or transaction between the Corporation and one or more of its members of the Board or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are members of the Board or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee thereof that authorizes the contract or transaction, or solely because his, her or their votes are counted for such purpose, if: (a) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (b) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are

 

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known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (c) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board, a committee thereof, or the stockholders.

Section 8.2 : Quorum . Interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction.

ARTICLE IX

MISCELLANEOUS

Section 9.1 : Fiscal Year . The fiscal year of the Corporation shall be determined by resolution of the Board.

Section 9.2 : Seal . The Board may provide for a corporate seal, which may have the name of the Corporation inscribed thereon and shall otherwise be in such form as may be approved from time to time by the Board.

Section 9.3 : Form of Records . Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on or by means of, or be in the form of, diskettes, compact discs or any other information storage device or method, provided that the records so kept can be converted into clearly legible paper form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect such records pursuant to any provision of the DGCL.

Section 9.4 : Reliance Upon Books and Records . A member of the Board, or a member of any committee designated by the Board shall, in the performance of such person’s duties, be fully protected in relying in good faith upon records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation’s officers or employees, or committees of the Board, or by any other person as to matters the member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation.

Section 9.5 : Certificate of Incorporation Governs . In the event of any conflict or inconsistency between the provisions of the Certificate of Incorporation and these Amended and Restated Bylaws, the provisions of the Certificate of Incorporation shall govern and prevail.

Section 9.6 : Severability . If any provision of these Amended and Restated Bylaws shall be held to be invalid, illegal, unenforceable or in conflict with the provisions of the Certificate of Incorporation, then such provision shall nonetheless be enforced to the maximum extent possible consistent with such holding and the remaining provisions of these Amended and Restated Bylaws (including without limitation, all portions of any section of these Amended and Restated Bylaws containing any such provision held to be invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation, that are not themselves invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation) shall remain in full force and effect.

Section 9.7 : Forum for Certain Actions . Except for (a) actions in which the Court of Chancery in the State of Delaware concludes that an indispensable party is not subject to the jurisdiction of the Delaware courts, and (b) actions in which a federal court has assumed exclusive jurisdiction of a proceeding, any derivative action brought by or on behalf of the Corporation, and any direct action brought by a stockholder against the Corporation or any of its directors or officers, alleging a violation of

 

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the DGCL, the Corporation’s Certificate of Incorporation or Amended and Restated Bylaws or breach of fiduciary duties or other violation of Delaware decisional law relating to the internal affairs of the Corporation, shall be brought in the Court of Chancery in the State of Delaware, which shall be the sole and exclusive forum for such proceedings; provided , however , that the Corporation may consent to an alternative forum for any such proceedings upon the approval of the Board. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Section 9.7.

ARTICLE X

AMENDMENT

Section 10.1 : Amendments . Notwithstanding any other provision of these Bylaws, any amendment or repeal of these Bylaws shall require the approval of the Whole Board or the stockholders of the Corporation as provided in the Certificate of Incorporation.

* * * * *

 

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CERTIFICATION OF AMENDED AND RESTATED BYLAWS

OF

IMPERVA, INC.

(a Delaware corporation)

I, Trâm Phi, certify that I am Secretary of Imperva, Inc., a Delaware corporation (the “ Company ”), that I am duly authorized to make and deliver this certification, that the attached Amended and Restated Bylaws are a true and correct copy of the Amended and Restated Bylaws of the Company in effect as of the date of this certificate.

Dated:              , 2011

 

   
Trâm Phi, Secretary

Exhibit 4.1

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FINISHED PAGE SIZE = 8.0” X 12.0” FRONT COMMON STOCK COMMON STOCK NUMBER IMPV 001 INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 45321L 10 0 IMPERVATHIS CERTIFIES THAT IS THE RECORD HOLDER OF FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.0001 PAR VALUE PER SHARE, OF, IMPERVA, INC. transferable on the books of the Corporation in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate shall not be valid until countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile signatures of its duly authorized officers. IS THE RECORD HOLDER OF Dated: SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: MELLON INVESTOR SERVICES LLC TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE INKS USED: PMS 540 BLUE PMS 166 ORANGE BLACK OFFSETINTAGLIO LEGEND INDICATES (WILL NOT PRINT): PAGE SIZE *** ARTWORK APPROVAL *** It is the customer’s responsibility to ensure that this proof is correct in all areas. By approving this proof the customer states that he or she has reviewed all elements and assumes sole responsibility and liability for: 1.) copy, color, spelling, grammar, layout, etc. 2.) any errors or omissions including defects in the designation 3.) infringement or interference with trademarks, copyrights, designs, or any other property rights of another. Customer agrees to defend, indemnify and hold Sekuworks, LLC harmless from all expenses, loss or damage resulting from any claim based upon any of the foregoing customer responsibilities. All artwork must be approved by the customer with an authorized email and/or signature before a job can be entered into production.


LOGO

BACK FINISHED PAGE SIZE = 8.0” X 12.0” IMPERVA, INC. The Corporation will furnish to any stockholder upon request and without charge the designations, relative rights, preferences and limitations applicable to each class of stock of the Corporation and the variations in rights, preferences and limitations determined for each series of stock of the Corporation, and authority of the Board of Directors to determine variations for future series of stock of the Corporation The. request shall be made to the Corporation’s Secretary at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM- as tenants in common UNIF GIFT MIN ACT- Custodian (Cust) (Minor) TEN ENT- as tenants by the entireties JT TEN- as joint tenants with right under Uniform Gifts to Minors of survivorship and not as Act tenants in common (State) UNIF TRF MIN ACT- Custodian age(until ) (Cust) under Uniform Transfers (Minor) to Minors Act (State) Additional abbreviations may also be used though not in the above list. For value received, hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE Print(Please or Typewrite Name and Address, Including Zip Code, of Assignee) shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer said stock on the books of the within named Association with full power of substitution in the premises. Dated Notice: The signature to this assignment must correspond with the name as written upon the face of the Certificate in every particular, without alteration or enlargement or any change whatever. Signature(s) Guaranteed By The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan association and credit unions with membership in an approved signature guarantee medallion program) pursuant to SRule. 17Ad. INKS USED: BLACK OFFSET LEGEND INDICATES (WILL NOT PRINT): PAGE SIZE *** ARTWORK APPROVAL *** It is the customer’s responsibility to ensure that this proof is correct in all areas. By approving this proof the customer states that he or she has reviewed all elements and assumes sole responsibility and liability for: 1.) copy, color, spelling, grammar, layout, etc. 2.) any errors or omissions including defects in the designation 3.) infringement or interference with trademarks, copyrights, designs, or any other property rights of another. Customer agrees to defend, indemnify and hold Sekuworks, LLC harmless from all expenses, loss or damage resulting from any claim based upon any of the foregoing customer responsibilities. All artwork must be approved by the customer with an authorized email and/or signature before a job can be entered into production.

Exhibit 5.1

 

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Goodwin Procter LLP

Counselors at Law

135 Commonwealth Drive

Menlo Park, CA 94025-1105

T: 650.752.3100

F: 650.853.1038

October 27, 2011

Imperva, Inc.

3400 Bridge Parkway, Suite 200

Redwood Shores, CA 94065

 

  Re: Securities Registered under Registration Statement on Form S-1

Ladies and Gentlemen:

We have acted as counsel to you in connection with your filing of a Registration Statement on Form S-1 (File No. 333-175008) (as amended or supplemented, the “Registration Statement”) pursuant to the Securities Act of 1933, as amended (the “Securities Act”), relating to the registration of the offering by Imperva, Inc., a Delaware corporation (the “Company”) of up to 5,750,000 shares (the “Shares”) of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), which includes up to 5,500,000 shares of Common Stock (the “Company Shares”) to be newly issued and sold by the Company and up to 250,000 shares of Common Stock (the “Selling Stockholder Shares”) to be sold by the selling stockholders listed in the Registration Statement under “Principal and Selling Stockholders” (the “Selling Stockholders”), including Shares purchasable by the underwriters upon their exercise of an over-allotment option granted to the underwriters by the Company. The Shares are being sold to the several underwriters named in, and pursuant to an underwriting agreement among the Company and such underwriters (the “Underwriting Agreement”).

We have reviewed such documents and made such examination of law as we have deemed appropriate to give the opinions expressed below. We have relied, without independent verification, on certificates of public officials and, as to matters of fact material to the opinions set forth below, on certificates of officers of the Company.

The opinion expressed below is limited to the Delaware General Corporation Law (which includes reported judicial decisions interpreting the Delaware General Corporation Law).

Based on the foregoing, we are of the opinion that the Company Shares have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and non-assessable and


Imperva, Inc.

October 27, 2011

Page 2

 

that the Selling Stockholder Shares have been duly authorized and validly issued, and are fully paid and non-assessable.

We hereby consent to the inclusion of this opinion as Exhibit 5.1 to the Registration Statement and to the references to our firm under the caption “Legal Matters” in the Registration Statement. In giving our consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations thereunder.

 

Very truly yours,
/s/ Goodwin Procter LLP
GOODWIN PROCTER LLP

Exhibit 10.3

IMPERVA, INC.

2011 Stock Option and Incentive Plan

1. PURPOSE . The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, and any Parents and Subsidiaries that exist now or in the future, by offering them an opportunity to participate in the Company’s future performance through the grant of Awards. Capitalized terms not defined elsewhere in the text are defined in Section 27.

2 . SHARES SUBJECT TO THE PLAN .

2.1 Number of Shares Available . Subject to Sections 2.4, 2.6 and any other applicable provisions hereof, the total number of Shares reserved and available for grant and issuance pursuant to this Plan as of the date of adoption of this Plan by the Board, is 1,000,000 Shares plus (a) any reserved shares not issued or subject to outstanding grants under the Company’s 2003 Stock Plan (together with any subplans and addenda adopted thereunder, the “ Prior Plan ”) on the Effective Date, (b) shares that are subject to stock options granted under the Prior Plan that cease to be subject to such stock options after the Effective Date (other than by exercise), (c) shares issued under the Prior Plan before or after the Effective Date pursuant to the exercise of stock options that are, after the Effective Date, forfeited, and (d) shares issued under the Prior Plan that are repurchased by the Company at the original issue price.

2.2 Lapsed, Returned Awards . Shares subject to Awards, and Shares issued under this Plan under any Award, will again be available for grant and issuance in connection with subsequent Awards under this Plan to the extent such Shares: (a) are subject to issuance upon exercise of an Option or SAR granted under this Plan but which cease to be subject to the Option or SAR for any reason other than exercise of the Option or SAR; (b) are subject to Awards granted under this Plan that are forfeited or are repurchased by the Company at the original issue price; (c) are subject to Awards granted under this Plan that otherwise terminate without such Shares being issued; or (d) are surrendered pursuant to an Exchange Program. To the extent an Award under this Plan is paid out in cash rather than Shares, such cash payment will not result in reducing the number of Shares available for issuance under this Plan. Shares used to pay the exercise price of an Award or to satisfy the tax withholding obligations related to an Award will become available for future grant or sale under this Plan. For the avoidance of doubt, Shares that otherwise become available for grant and issuance because of the provisions of this Section 2.2 shall not include Shares subject to Awards that initially became available because of the substitution clause in Section 21.2 hereof.

2.3 Minimum Share Reserve . At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Awards granted under this Plan.

2.4 Automatic Share Reserve Increase . The number of Shares available for grant and issuance under this Plan shall be increased on January 1, of each of 2012 through 2015, by the lesser of (a) four percent (4%) of the number of Shares issued and outstanding on each December 31 immediately prior to the date of increase (rounded down to the nearest whole share), or (b) such number of Shares determined by the Board.


2.5 Limitations . No more than 20,000,000 Shares shall be issued pursuant to the exercise of ISOs.

2.6 Adjustment of Shares . If the number of outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company, without consideration, then (a) the number of Shares reserved for issuance and future grant under this Plan set forth in Section 2.1, (b) the Exercise Prices of and number of Shares subject to outstanding Options and SARs, (c) the number of Shares subject to other outstanding Awards, (d) the maximum number of shares that may be issued as ISOs set forth in Section 2.5, (e) the maximum number of Shares that may be issued to an individual or to a new Employee in any one calendar year set forth in Section 3 and (f) the number of Shares that are granted as Awards to Non-Employee Directors as set forth in Section 12, shall be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and in compliance with applicable securities laws; provided that fractions of a Share will not be issued.

3. ELIGIBILITY . ISOs may be granted only to Employees. All other Awards may be granted to Employees, Consultants, Directors and Non-Employee Directors of the Company or any Parent or Subsidiary of the Company; provided such Consultants, Directors and Non-Employee Directors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. No Participant will be eligible to receive more than 500,000 Shares in any calendar year under this Plan pursuant to the grant of Awards except that new Employees of the Company or of a Parent or Subsidiary of the Company (including new Employees who are also officers and directors of the Company or any Parent or Subsidiary of the Company) are eligible to receive up to a maximum of 1,000,000 Shares in the calendar year in which they commence their employment.

4. ADMINISTRATION .

4.1 Committee Composition; Authority . This Plan will be administered by the Committee or by the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan, except, however, the Board shall establish the terms for the grant of an Award to Non-Employee Directors. The Committee will have the authority to:

(a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan;

(b) prescribe, amend and rescind rules and regulations relating to this Plan or any Award;

(c) select persons to receive Awards;

(d) determine the form and terms and conditions, not inconsistent with the terms of this Plan, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Committee will determine;

(e) determine the number of Shares or other consideration subject to Awards;

 

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(f) determine the Fair Market Value in good faith, if necessary;

(g) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company;

(h) grant waivers of Plan or Award conditions;

(i) determine the vesting, exercisability and payment of Awards;

(j) correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement;

(k) determine whether an Award has been earned;

(l) determine the terms and conditions of any, and to institute any Exchange Program;

(m) reduce or waive any criteria with respect to Performance Factors;

(n) adjust Performance Factors to take into account changes in law and accounting or tax rules as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships provided that such adjustments are consistent with the regulations promulgated under Section 162(m) of the Code with respect to persons whose compensation is subject to Section 162(m) of the Code; and

(o) make all other determinations necessary or advisable for the administration of this Plan.

4.2 Committee Interpretation and Discretion . Any determination made by the Committee with respect to any Award shall be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, at any later time, and such determination shall be final and binding on the Company and all persons having an interest in any Award under this Plan. Any dispute regarding the interpretation of this Plan or any Award Agreement shall be submitted by the Participant or Company to the Committee for review. The resolution of such a dispute by the Committee shall be final and binding on the Company and the Participant. The Committee may delegate to one or more executive officers the authority to review and resolve disputes with respect to Awards held by Participants who are not Insiders, and such resolution shall be final and binding on the Company and the Participant.

4.3 Section 162(m) of the Code and Section 16 of the Exchange Act . When necessary or desirable for an Award to qualify as “performance-based compensation” under Section 162(m) of the Code, the Committee shall include at least two persons who are “outside directors” (as defined under Section 162(m) of the Code) and at least two (or a majority if more than two then serve on the Committee) such “outside directors” shall approve the grant of such Award and timely determine (as applicable) the Performance Period and any Performance Factors upon which vesting or settlement of any portion of such Award is to be subject. When required by Section 162(m) of the Code, prior to settlement of any such Award at least two (or a majority if more than two then serve on the Committee) such “outside directors” then serving on the Committee shall determine and certify in writing the extent to which such Performance Factors have been timely achieved and the extent to which the Shares subject to such Award have thereby been earned. Awards granted to Participants who are subject to Section 16 of

 

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the Exchange Act must be approved by two or more “non-employee directors” (as defined in the regulations promulgated under Section 16 of the Exchange Act). With respect to Participants whose compensation is subject to Section 162(m) of the Code, and provided that such adjustments are consistent with the regulations promulgated under Section 162(m) of the Code, the Committee may adjust the performance goals to account for changes in law and accounting and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships, including without limitation (i) restructurings, discontinued operations, extraordinary items, and other unusual or non-recurring charges, (ii) an event either not directly related to the operations of the Company or not within the reasonable control of the Company’s management, or (iii) a change in accounting standards required by generally accepted accounting principles.

4.4 Foreign Award Recipients . Notwithstanding any provision of this Plan to the contrary, in order to comply with the laws in other countries in which the Company and its Subsidiaries operate or have employees or other individuals eligible for Awards, the Committee, in its sole discretion, shall have the power and authority to: (a) determine which Subsidiaries shall be covered by this Plan; (b) determine which individuals outside the United States are eligible to participate in this Plan; (c) modify the terms and conditions of any Award granted to individuals outside the United States to comply with applicable foreign laws; (d) establish subplans and modify exercise procedures and other terms and procedures, to the extent the Committee determines such actions to be necessary or advisable (and such subplans and/or modifications shall be attached to this Plan as appendices); provided, however, that no such subplans and/or modifications shall increase the share limitations contained in this Plan; and (e) take any action, before or after an Award is made, that the Committee determines to be necessary or advisable to obtain approval or comply with any local governmental regulatory exemptions or approvals. Notwithstanding the foregoing, the Committee may not take any actions hereunder, and no Awards shall be granted, that would violate the Exchange Act or any other applicable United States securities law, the Code, or any other applicable United States governing statute or law.

4.5 Documentation . The Award Agreement for a given Award, this Plan and any other documents may be delivered to, and accepted by, a Participant or any other person in any manner (including electronic distribution or posting) that meets applicable legal requirements.

5. OPTIONS . The Committee may grant Options to Participants and will determine whether such Options will be Incentive Stock Options within the meaning of the Code (“ ISOs ”) or Nonqualified Stock Options (“ NQSOs ”), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following:

5.1 Option Grant . Each Option granted under this Plan will identify the Option as an ISO or an NQSO. An Option may be, but need not be, awarded or vested upon satisfaction of such Performance Factors during any Performance Period as are set out in advance in the Participant’s individual Award Agreement. If the Option is being earned upon the satisfaction of Performance Factors, then the Committee will: (a) determine the nature, length and starting date of any Performance Period for each Option; and (b) select from among the Performance Factors to be used to measure the performance, if any. Performance Periods may overlap and Participants may participate simultaneously with respect to Options that are subject to different performance goals and other criteria.

5.2 Date of Grant . The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, or a specified future date. The Award Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option.

 

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5.3 Exercise Period . Options may be exercisable within the times or upon the conditions as set forth in the Award Agreement governing such Option; provided , however , that no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a person who, at the time the ISO is granted, directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company (“ Ten Percent Stockholder ”) will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines.

5.4 Exercise Price . The Exercise Price of an Option will be determined by the Committee when the Option is granted; provided that: (i) the Exercise Price of an ISO will be not less than one hundred percent (100%) of the Fair Market Value of the Shares on the date of grant and (ii) the Exercise Price of any ISO granted to a Ten Percent Stockholder will not be less than one hundred ten percent (110%) of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased must be made in accordance with Section 11 and the Award Agreement and in accordance with any procedures established by the Company. The Exercise Price of a NQSO may not be less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

5.5 Method of Exercise . Any Option granted hereunder will be exercisable according to the terms of this Plan and at such times and under such conditions as determined by the Committee and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share. An Option will be deemed exercised when the Company receives: (a) notice of exercise (in such form as the Committee may specify from time to time) from the person entitled to exercise the Option, and (b) full payment for the Shares with respect to which the Option is exercised (together with applicable withholding taxes). Full payment may consist of any consideration and method of payment authorized by the Committee and permitted by the Award Agreement and this Plan. Shares issued upon exercise of an Option will be issued in the name of the Participant. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder will exist with respect to the Shares, notwithstanding the exercise of the Option. The Company will issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 2.6 of this Plan. Exercising an Option in any manner will decrease the number of Shares thereafter available, both for purposes of this Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

5.6 Termination . The exercise of an Option will be subject to the following (except as may be otherwise provided in an Award Agreement):

(a) If the Participant is Terminated for any reason except for Cause or the Participant’s death or Disability, then the Participant may exercise such Participant’s Options only to the extent that such Options would have been exercisable by the Participant on the Termination Date no later than three (3) months after the Termination Date (or such shorter time period or longer time period not exceeding five (5) years as may be determined by the Committee, with any exercise beyond three (3) months after the Termination Date deemed to be the exercise of an NQSO), but in any event no later than the expiration date of the Options.

(b) If the Participant is Terminated because of the Participant’s death (or the Participant dies within three (3) months after a Termination other than for Cause or because of the Participant’s Disability), then the Participant’s Options may be exercised only to the extent that such

 

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Options would have been exercisable by the Participant on the Termination Date and must be exercised by the Participant’s legal representative, or authorized assignee, no later than twelve (12) months after the Termination Date (or such shorter time period not less than six (6) months or longer time period not exceeding five (5) years as may be determined by the Committee), but in any event no later than the expiration date of the Options.

(c) If the Participant is Terminated because of the Participant’s Disability, then the Participant’s Options may be exercised only to the extent that such Options would have been exercisable by the Participant on the Termination Date and must be exercised by the Participant (or the Participant’s legal representative or authorized assignee) no later than twelve (12) months after the Termination Date (with any exercise beyond (a) three (3) months after the Termination Date when the Termination is for a Disability that is not a “permanent and total disability” as defined in Section 22(e)(3) of the Code, or (b) twelve (12) months after the Termination Date when the Termination is for a Disability that is a “permanent and total disability” as defined in Section 22(e)(3) of the Code, deemed to be exercise of an NQSO), but in any event no later than the expiration date of the Options.

(d) If the Participant is terminated for Cause, then Participant’s Options shall expire on such Participant’s Termination Date, or at such later time and on such conditions as are determined by the Committee, but in any no event later than the expiration date of the Options.

5.7 Limitations on Exercise . The Committee may specify a minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent any Participant from exercising the Option for the full number of Shares for which it is then exercisable.

5.8 Limitations on ISOs . With respect to Awards granted as ISOs, to the extent that the aggregate Fair Market Value of the Shares with respect to which such ISOs are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds one hundred thousand dollars ($100,000), such Options will be treated as NQSOs. For purposes of this Section 5.8, ISOs will be taken into account in the order in which they were granted. The Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is granted. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment.

5.9 Modification, Extension or Renewal . The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant’s rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. Subject to Section 18 of this Plan, by written notice to affected Participants, the Committee may reduce the Exercise Price of outstanding Options without the consent of such Participants; provided , however , that the Exercise Price may not be reduced below the Fair Market Value on the date the action is taken to reduce the Exercise Price.

5.10 No Disqualification . Notwithstanding any other provision in this Plan, no term of this Plan relating to ISOs will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code.

 

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6. RESTRICTED STOCK AWARDS .

6.1 Awards of Restricted Stock . A Restricted Stock Award is an offer by the Company to sell to a Participant Shares that are subject to restrictions (“ Restricted Stock ”). The Committee will determine to whom an offer will be made, the number of Shares the Participant may purchase, the Purchase Price, the restrictions under which the Shares will be subject and all other terms and conditions of the Restricted Stock Award, subject to this Plan.

6.2 Restricted Stock Purchase Agreement . All purchases under a Restricted Stock Award will be evidenced by an Award Agreement. Except as may otherwise be provided in an Award Agreement, a Participant accepts a Restricted Stock Award by signing and delivering to the Company an Award Agreement with full payment of the Purchase Price, within thirty (30) days from the date the Award Agreement was delivered to the Participant. If the Participant does not accept such Award within thirty (30) days, then the offer of such Restricted Stock Award will terminate, unless the Committee determines otherwise.

6.3 Purchase Price . The Purchase Price for a Restricted Stock Award will be determined by the Committee, may be less than Fair Market Value on the date the Restricted Stock Award is granted, and may be zero. Payment of the Purchase Price must be made in accordance with Section 11 of this Plan, and the Award Agreement and in accordance with any procedures established by the Company.

6.4 Terms of Restricted Stock Awards . Restricted Stock Awards will be subject to such restrictions as the Committee may impose or are required by law. These restrictions may be based on completion of a specified number of years of service with the Company or upon completion of Performance Factors, if any, during any Performance Period as set out in advance in the Participant’s Award Agreement. Prior to the grant of a Restricted Stock Award, the Committee shall: (a) determine the nature, length and starting date of any Performance Period for the Restricted Stock Award; (b) select from among the Performance Factors to be used to measure performance goals, if any; and (c) determine the number of Shares that may be awarded to the Participant. Performance Periods may overlap and a Participant may participate simultaneously with respect to Restricted Stock Awards that are subject to different Performance Periods and having different performance goals and other criteria.

6.5 Termination of Participant . Except as may be set forth in the Participant’s Award Agreement, vesting ceases on such Participant’s Termination Date (unless determined otherwise by the Committee).

7. STOCK BONUS AWARDS .

7.1 Awards of Stock Bonuses . A Stock Bonus Award is an award to an eligible person of Shares for services to be rendered or for past services already rendered to the Company or any Parent or Subsidiary. All Stock Bonus Awards shall be made pursuant to an Award Agreement. Except as otherwise determined by the Committee, no payment from the Participant will be required for Shares awarded pursuant to a Stock Bonus Award. If the Committee requires payment for Shares awarded pursuant to a Stock Bonus Award, the Purchase Price will be determined by the Committee and may be less than Fair Market Value on the date the Stock Bonus Award is granted. Payment of the Purchase Price must be made in accordance with Section 11 of this Plan, and the Award Agreement and in accordance with any procedures established by the Company.

7.2 Terms of Stock Bonus Awards . The Committee will determine the number of Shares to be awarded to the Participant under a Stock Bonus Award and the restrictions thereon (if any).

 

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These restrictions may be based upon completion of a specified number of years of service with the Company or upon satisfaction of performance goals based on Performance Factors during any Performance Period as set out in advance in the Participant’s Stock Bonus Agreement. Prior to the grant of any Stock Bonus Award subject to restrictions or performance goals, the Committee shall: (a) determine the nature, length and starting date of any Performance Period for the Stock Bonus Award; (b) select from among the Performance Factors to be used to measure performance goals; and (c) determine the number of Shares that may be awarded to the Participant. Performance Periods may overlap and a Participant may participate simultaneously with respect to Stock Bonus Awards that are subject to different Performance Periods and different performance goals and other criteria.

7.3 Form of Payment to Participant . Payment may be made in the form of cash, whole Shares, or a combination thereof, based on the Fair Market Value of the Shares earned under a Stock Bonus Award on the date of payment, as determined in the sole discretion of the Committee.

7.4 Termination of Participation . Except as may be set forth in the Participant’s Award Agreement, vesting ceases on such Participant’s Termination Date (unless determined otherwise by the Committee).

8. STOCK APPRECIATION RIGHTS .

8.1 Awards of SARs . A Stock Appreciation Right (“ SAR ”) is an award to a Participant that may be settled in cash, or Shares (which may consist of Restricted Stock), having a value equal to (a) the difference between the Fair Market Value on the date of exercise over the Exercise Price multiplied by (b) the number of Shares with respect to which the SAR is being settled (subject to any maximum number of Shares that may be issuable as specified in an Award Agreement). All SARs shall be made pursuant to an Award Agreement.

8.2 Terms of SARs . The Committee will determine the terms of each SAR including, without limitation: (a) the number of Shares subject to the SAR; (b) the Exercise Price and the time or times during which the SAR may be settled; (c) the consideration to be distributed on settlement of the SAR; and (d) the effect of the Participant’s Termination on each SAR. The Exercise Price of the SAR will be determined by the Committee when the SAR is granted, and may not be less than Fair Market Value. A SAR may be awarded upon satisfaction of Performance Factors, if any, during any Performance Period as are set out in advance in the Participant’s individual Award Agreement. If the SAR is being earned upon the satisfaction of Performance Factors, then the Committee will: (x) determine the nature, length and starting date of any Performance Period for each SAR; and (y) select from among the Performance Factors to be used to measure the performance, if any. Performance Periods may overlap and Participants may participate simultaneously with respect to SARs that are subject to different Performance Factors and other criteria.

8.3 Exercise Period and Expiration Date . A SAR will be exercisable within the times or upon the occurrence of events determined by the Committee and set forth in the Award Agreement governing such SAR. The SAR Agreement shall set forth the expiration date; provided that no SAR will be exercisable after the expiration of ten (10) years from the date the SAR is granted. The Committee may also provide for SARs to become exercisable at one time or from time to time, periodically or otherwise (including, without limitation, upon the attainment during a Performance Period of performance goals based on Performance Factors), in such number of Shares or percentage of the Shares subject to the SAR as the Committee determines. Except as may be set forth in the Participant’s Award Agreement, vesting ceases on such Participant’s Termination Date (unless determined otherwise by the Committee). Notwithstanding the foregoing, the rules of Section 5.6 also will apply to SARs.

 

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8.4 Form of Settlement . Upon exercise of a SAR, a Participant will be entitled to receive payment from the Company in an amount determined by multiplying (i) the difference between the Fair Market Value of a Share on the date of exercise over the Exercise Price; times (ii) the number of Shares with respect to which the SAR is exercised. At the discretion of the Committee, the payment from the Company for the SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof. The portion of a SAR being settled may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee determines, provided that the terms of the SAR and any deferral satisfy the requirements of Section 409A of the Code.

8.5 Termination of Participation . Except as may be set forth in the Participant’s Award Agreement, vesting ceases on such Participant’s Termination Date (unless determined otherwise by the Committee).

9. RESTRICTED STOCK UNITS .

9.1 Awards of Restricted Stock Units . A Restricted Stock Unit (“ RSU ”) is an award to a Participant covering a number of Shares that may be settled in cash, or by issuance of those Shares (which may consist of Restricted Stock). All RSUs shall be made pursuant to an Award Agreement.

9.2 Terms of RSUs . The Committee will determine the terms of an RSU including, without limitation: (a) the number of Shares subject to the RSU; (b) the time or times during which the RSU may be settled; and (c) the consideration to be distributed on settlement, and the effect of the Participant’s Termination on each RSU. An RSU may be awarded upon satisfaction of such performance goals based on Performance Factors during any Performance Period as are set out in advance in the Participant’s Award Agreement. If the RSU is being earned upon satisfaction of Performance Factors, then the Committee will: (x) determine the nature, length and starting date of any Performance Period for the RSU; (y) select from among the Performance Factors to be used to measure the performance, if any; and (z) determine the number of Shares deemed subject to the RSU. Performance Periods may overlap and participants may participate simultaneously with respect to RSUs that are subject to different Performance Periods and different performance goals and other criteria.

9.3 Form and Timing of Settlement . Payment of earned RSUs shall be made as soon as practicable after the date(s) determined by the Committee and set forth in the Award Agreement. The Committee, in its sole discretion, may settle earned RSUs in cash, Shares, or a combination of both. The Committee also may permit a Participant to defer payment under a RSU to a date or dates after the RSU is earned provided that the terms of the RSU and any deferral satisfy the requirements of Section 409A of the Code.

9.4 Termination of Participant . Except as may be set forth in the Participant’s Award Agreement, vesting ceases on such Participant’s Termination Date (unless determined otherwise by the Committee).

10. PERFORMANCE SHARES .

10.1 Awards of Performance Shares . A Performance Share Award is an award to a Participant denominated in Shares that may be settled in cash, or by issuance of those Shares (which may consist of Restricted Stock). Grants of Performance Shares shall be made pursuant to an Award Agreement.

10.2 Terms of Performance Shares . The Committee will determine, and each Award Agreement shall set forth, the terms of each award of Performance Shares including, without limitation:

 

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(a) the number of Shares deemed subject to such Award; (b) the Performance Factors and Performance Period that shall determine the time and extent to which each award of Performance Shares shall be settled; (c) the consideration to be distributed on settlement, and the effect of the Participant’s Termination on each award of Performance Shares. In establishing Performance Factors and the Performance Period the Committee will: (x) determine the nature, length and starting date of any Performance Period; (y) select from among the Performance Factors to be used; and (z) determine the number of Shares deemed subject to the award of Performance Shares. Prior to settlement the Committee shall determine the extent to which Performance Shares have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Performance Shares that are subject to different Performance Periods and different performance goals and other criteria.

10.3 Value, Earning and Timing of Performance Shares . Each Performance Share will have an initial value equal to the Fair Market Value of a Share on the date of grant. After the applicable Performance Period has ended, the holder of Performance Shares will be entitled to receive a payout of the number of Performance Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding Performance Factors or other vesting provisions have been achieved. The Committee, in its sole discretion, may pay earned Performance Shares in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned Performance Shares at the close of the applicable Performance Period) or in a combination thereof.

10.4 Termination of Participant . Except as may be set forth in the Participant’s Award Agreement, vesting ceases on such Participant’s Termination Date (unless determined otherwise by the Committee).

11. PAYMENT FOR SHARE PURCHASES .

Payment from a Participant for Shares purchased pursuant to this Plan may be made in cash or by check or, where expressly approved for the Participant by the Committee and where permitted by law (and to the extent not otherwise set forth in the applicable Award Agreement):

(a) by cancellation of Participant’s indebtedness to the Company;

(b) by surrender of shares of the Company held by the Participant that have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Award will be exercised or settled;

(c) by waiver of compensation due or accrued to the Participant for services rendered or to be rendered to the Company or a Parent or Subsidiary of the Company;

(d) by consideration received by the Company pursuant to a broker-assisted or other cashless exercise program implemented by the Company in connection with this Plan;

(e) by any combination of the foregoing; or

(f) by any other method of payment as is permitted by applicable law.

12. GRANTS TO NON-EMPLOYEE DIRECTORS .

12.1 Types of Awards . Non-Employee Directors are eligible to receive any type of Award offered under this Plan except ISOs. Awards pursuant to this Section 12 may be automatically

 

10


made pursuant to policy adopted by the Board, or made from time to time as determined in the discretion of the Board. The aggregate number of Shares subject to Awards granted to a Non-Employee Director pursuant to this Section 12 in any calendar year shall not exceed 250,000 shares; provided however, that this maximum number can later be increased by the Board effective for the calendar year next commencing thereafter without further stockholder approval.

12.2 Eligibility . Awards pursuant to this Section 12 shall be granted only to Non-Employee Directors. A Non-Employee Director who is elected or re-elected as a member of the Board will be eligible to receive an Award under this Section 12.

12.3 Vesting, Exercisability and Settlement . Except as set forth in Section 21, Awards shall vest, become exercisable and be settled as determined by the Board. With respect to Options and SARs, the exercise price granted to Non-Employee Directors shall not be less than the Fair Market Value of the Shares at the time that such Option or SAR is granted.

13. WITHHOLDING TAXES .

13.1 Withholding Generally . Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy applicable federal, state, local and international withholding tax requirements prior to the delivery of Shares pursuant to exercise or settlement of any Award. Whenever payments in satisfaction of Awards granted under this Plan are to be made in cash, such payment will be net of an amount sufficient to satisfy applicable federal, state, local and international withholding tax requirements.

13.2 Stock Withholding . The Committee, in its sole discretion and pursuant to such procedures as it may specify from time to time, may require or permit a Participant to satisfy such tax withholding obligation, in whole or in part by (without limitation) (i) paying cash, (ii) electing to have the Company withhold otherwise deliverable cash or Shares having a Fair Market Value equal to the minimum statutory amount required to be withheld, or (iii) delivering to the Company already-owned Shares having a Fair Market Value equal to the minimum amount required to be withheld. The Fair Market Value of the Shares to be withheld or delivered will be determined as of the date that the taxes are required to be withheld.

14. TRANSFERABILITY . Unless determined otherwise by the Committee, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution. If the Committee makes an Award transferable, such Award will contain such additional terms and conditions as the Committee deems appropriate. All Awards shall be exercisable: (i) during the Participant’s lifetime only by (A) the Participant, or (B) the Participant’s guardian or legal representative; and (ii) after the Participant’s death, by the legal representative of the Participant’s heirs or legatees.

15. PRIVILEGES OF STOCK OWNERSHIP; RESTRICTIONS ON SHARES .

15.1 Voting and Dividends . No Participant will have any of the rights of a stockholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a stockholder and have all the rights of a stockholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided , that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Stock; provided , further , that the

 

11


Participant will have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant’s Purchase Price or Exercise Price, as the case may be, pursuant to Section 15.2.

15.2 Restrictions on Shares . At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) a right to repurchase (a “ Right of Repurchase ”) a portion of any or all Unvested Shares held by a Participant following such Participant’s Termination at any time within ninety (90) days after the later of the Participant’s Termination Date and the date the Participant purchases Shares under this Plan, for cash and/or cancellation of purchase money indebtedness, at the Participant’s Purchase Price or Exercise Price, as the case may be. The Company’s Right of Repurchase shall be automatic with respect to Unvested Shares awarded to the Participant for no Purchase Price.

16. CERTIFICATES . All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted.

17. ESCROW; PLEDGE OF SHARES . To enforce any restrictions on a Participant’s Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of the Participant’s obligation to the Company under the promissory note; provided , however , that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant’s Shares or other collateral. In connection with any pledge of the Shares, the Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid.

18. REPRICING; EXCHANGE AND BUYOUT OF AWARDS . Without prior stockholder approval, the Committee may (a) reprice Options or SARS (and where such repricing is a reduction in the Exercise Price of outstanding Options or SARS, the consent of the affected Participants is not required provided written notice is provided to them), and (b) with the consent of the respective Participants (unless not required pursuant to Section 5.9 of this Plan), pay cash or issue new Awards in exchange for the surrender and cancellation of any, or all, outstanding Awards.

19. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE . An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register

 

12


the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so.

20. NO OBLIGATION TO EMPLOY . Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant’s employment or other relationship at any time.

21. CORPORATE TRANSACTIONS .

21.1 Assumption or Replacement of Awards by Successor . In the event of a Corporate Transaction any or all outstanding Awards may be assumed or replaced by the successor corporation, which assumption or replacement shall be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to stockholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor or acquiring corporation (if any) refuses to assume, convert, replace or substitute Awards, as provided above, pursuant to a Corporate Transaction, then notwithstanding any other provision in this Plan to the contrary, such Awards will expire on such transaction at such time and on such conditions as the Board will determine; the Board (or, the Committee, if so designated by the Board) may, in its sole discretion, accelerate the vesting of such Awards in connection with a Corporate Transaction. In addition, in the event such successor or acquiring corporation (if any) refuses to assume, convert, replace or substitute Awards, as provided above, pursuant to a Corporate Transaction, the Committee will notify the Participant in writing or electronically that such Award will be exercisable for a period of time determined by the Committee in its sole discretion, and such Award will terminate upon the expiration of such period. Awards need not be treated similarly in a Corporate Transaction.

Notwithstanding anything to the contrary in this Section 21.1, the Committee, in its sole discretion, may grant Awards that provide for acceleration upon a Corporate Transaction or in other events in the specific Award Agreements.

21.2 Assumption of Awards by the Company . The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either; (a) granting an Award under this Plan in substitution of such other company’s award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged ( except that the Purchase Price or the Exercise Price, as the case may be, and the number and nature of Shares issuable upon exercise or settlement of any such Award will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option in substitution rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price.

21.3 Non-Employee Directors’ Awards . Notwithstanding any provision to the contrary herein, in the event of a Corporate Transaction, the vesting of all Awards granted to Non-

 

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Employee Directors shall accelerate and such Awards shall become exercisable (as applicable) in full prior to the consummation of such event at such times and on such conditions as the Committee determines.

22. ADOPTION AND STOCKHOLDER APPROVAL . This Plan shall be submitted for the approval of the Company’s stockholders, consistent with applicable laws, within twelve (12) months before or after the date this Plan is adopted by the Board.

23. TERM OF PLAN/GOVERNING LAW . Unless earlier terminated as provided herein, this Plan will become effective on the Effective Date and will terminate ten (10) years from the date this Plan is adopted by the Board. This Plan and all Awards granted hereunder shall be governed by and construed in accordance with the laws of the State of Delaware.

24. AMENDMENT OR TERMINATION OF PLAN . The Board may at any time terminate or amend this Plan in any respect, including, without limitation, amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided , however , that the Board will not, without the approval of the stockholders of the Company, amend this Plan in any manner that requires such stockholder approval; provided further , that a Participant’s Award shall be governed by the version of this Plan then in effect at the time such Award was granted.

25. NONEXCLUSIVITY OF THE PLAN . Neither the adoption of this Plan by the Board, the submission of this Plan to the stockholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock awards and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases.

26. INSIDER TRADING POLICY . Each Participant who receives an Award shall comply with any policy adopted by the Company from time to time covering transactions in the Company’s securities by Employees, officers and/or directors of the Company.

27. DEFINITIONS . As used in this Plan, and except as elsewhere defined herein, the following terms will have the following meanings:

Award ” means any award under this Plan, including any Option, Restricted Stock, Stock Bonus, Stock Appreciation Right, Restricted Stock Unit or award of Performance Shares.

Award Agreement ” means, with respect to each Award, the written or electronic agreement between the Company and the Participant setting forth the terms and conditions of the Award, which shall be in substantially a form (which need not be the same for each Participant) that the Committee has from time to time approved, and will comply with and be subject to the terms and conditions of this Plan.

Board ” means the Board of Directors of the Company.

Cause ” means (except as may otherwise be defined in Participant’s employment or services agreement or Award Agreement) (a) the commission of an act of theft, embezzlement, fraud or dishonesty, (b) a breach of fiduciary duty to the Company or a Parent or Subsidiary, or (c) a failure to materially perform the customary duties of Employee’s employment.

Code ” means the United States Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

 

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Common Stock ” means the common stock of the Company.

Committee ” means the Compensation Committee of the Board or those persons to whom administration of this Plan, or part of this Plan, has been delegated as permitted by law.

Company ” means Imperva, Inc., or any successor corporation.

Consultant ” means any person, including an advisor or independent contractor, engaged by the Company or a Parent or Subsidiary to render services to such entity.

Corporate Transaction ” means the occurrence of any of the following events: (a) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) or “group” (two or more persons acting as a partnership, limited partnership, syndicate or other group for the purpose of acquiring, holding, or disposing of the applicable securities referred to herein) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then-outstanding voting securities; (b) the consummation of the sale or other disposition by the Company of all or substantially all of the Company’s assets; (c) the consummation of a merger, reorganization, consolidation or similar transaction or series of related transactions of the Company with any other corporation, other than a merger, reorganization, consolidation or similar transaction (or series of related transactions) which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least a majority of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger, reorganization, consolidation or similar transaction (or series of related transactions), or (d) any other transaction which qualifies as a “corporate transaction” under Section 424(a) of the Code wherein the stockholders of the Company give up all of their equity interest in the Company (except for the acquisition, sale or transfer of all or substantially all of the outstanding shares of the Company).

Director ” means a member of the Board.

Disability means total and permanent disability as defined in Section 22(e)(3) of the Code, provided, however, that except with respect to Awards granted as ISOs, the Committee in its discretion may determine whether a total and permanent disability exists in accordance with non-discriminatory and uniform standards adopted by the Committee from time to time, whether temporary or permanent, partial or total, as determined by the Committee.

Effective Date ” means the date of the underwritten initial public offering of the Company’s Common Stock pursuant to a registration statement that is declared effective by the SEC.

Employee ” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director’s fee by the Company will be sufficient to constitute “employment” by the Company.

Exchange Act ” means the United States Securities Exchange Act of 1934, as amended.

Exchange Program ” means a program pursuant to which outstanding Awards are surrendered, cancelled or exchanged for cash, the same type of Award or a different Award (or combination thereof).

Exercise Price ” means, with respect to an Option, the price at which a holder may purchase the Shares issuable upon exercise of an Option, and with respect to a SAR, the price at which the SAR is

 

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granted to the holder thereof.

Fair Market Value ” means, as of any date, the value of a share of the Company’s Common Stock determined as follows:

(a) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal or such other source as the Board or the Committee deems reliable;

(b) if such Common Stock is publicly traded but is neither listed nor admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal or such other source as the Board or the Committee deems reliable;

(c) in the case of an Option or SAR grant made on the Effective Date, the price per share at which shares of the Company’s Common Stock are initially offered for sale to the public by the Company’s underwriters in the initial public offering of the Company’s Common Stock pursuant to a registration statement filed with the SEC under the Securities Act; or

(d) if none of the foregoing is applicable, by the Board or the Committee in good faith.

Insider ” means an officer or director of the Company or any other person whose transactions in the Company’s Common Stock are subject to Section 16 of the Exchange Act.

Non-Employee Director ” means a Director who is not an Employee of the Company or any Parent or Subsidiary.

Option ” means an award of an option to purchase Shares pursuant to Section 5.

Parent ” means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

Participant ” means a person who holds an Award under this Plan.

Performance Factors ” means the factors selected by the Committee, which may include, but are not limited to the, the following measures (whether or not in comparison to other peer companies) to determine whether the performance goals established by the Committee and applicable to Awards have been satisfied:

 

   

net revenue and/or net revenue growth;

 

   

earnings per share and/or earnings per share growth;

 

   

earnings before income taxes and amortization and/or earnings before income taxes and amortization growth;

 

   

operating income and/or operating income growth;

 

16


   

net income and/or net income growth;

 

   

total stockholder return and/or total stockholder return growth;

 

   

return on equity;

 

   

operating cash flow return on income;

 

   

adjusted operating cash flow return on income;

 

   

economic value added;

 

   

control of expenses;

 

   

cost of goods sold;

 

   

profit margin;

 

   

stock price;

 

   

debt or debt-to-equity;

 

   

liquidity;

 

   

intellectual property (e.g., patents)/product development;

 

   

mergers and acquisitions or divestitures;

 

   

individual business objectives;

 

   

company-specific operational metrics; and

 

   

any other factor (such as individual business objectives or unit-specific operational metrics) the Committee so designates.

Performance Period ” means the period of service determined by the Committee, not to exceed five (5) years, during which years of service or performance is to be measured for the Award.

Performance Share ” means an Award granted pursuant to Section 10 or Section 12 of this Plan.

Plan ” means this Imperva, Inc. 2011 Stock Option and Incentive Plan.

Purchase Price ” means the price to be paid for Shares acquired under this Plan, other than Shares acquired upon exercise of an Option or SAR.

Restricted Stock Award ” means an award of Shares pursuant to Section 6 or Section 12 of this Plan, or issued pursuant to the early exercise of an Option.

Restricted Stock Unit ” means an Award granted pursuant to Section 9 or Section 12 of this Plan.

SEC ” means the United States Securities and Exchange Commission.

 

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Securities Act ” means the United States Securities Act of 1933, as amended.

Shares ” means shares of the Company’s Common Stock, as adjusted pursuant to Sections 2 and other applicable provisions hereof, and any successor security.

Stock Appreciation Right ” means an Award granted pursuant to Section 8 or Section 12 of this Plan.

Stock Bonus ” means an Award granted pursuant to Section 7 or Section 12 of this Plan.

Subsidiary ” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

Termination ” or “ Terminated ” means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, officer, director, consultant, independent contractor or advisor to the Company or a Parent or Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee; provided , that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated to employees in writing. In the case of any employee on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the employ of the Company or a Parent or Subsidiary of the Company as it may deem appropriate, except that in no event may an Award be exercised after the expiration of the term set forth in the applicable Award Agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the “ Termination Date ”).

Unvested Shares ” means Shares that have not yet vested or are subject to a right of repurchase in favor of the Company (or any successor thereto).

 

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IMPERVA, INC.

2011 STOCK OPTION AND INCENTIVE PLAN

NOTICE OF PERFORMANCE SHARES AWARD

Unless otherwise defined herein, the terms defined in the Imperva, Inc. (the “ Company ”) 2011 Stock Option and Incentive Plan (the “ Plan ”) shall have the same meanings in this Notice of Performance Shares Award (the “ Notice ”).

 

    Name:

     

    Address:         

     

You (“ Participant ”) have been granted an award of Performance Shares under the Plan subject to the terms and conditions of the Plan, this Notice and the attached Performance Shares Award Agreement (hereinafter “ Performance Shares Agreement ”).

 

     Number of Shares:

    
 

 

  

     Date of Grant:

    
 

 

  

     Vesting Commencement Date:     

    
 

 

  

     Expiration Date:

  The date on which all the Shares granted hereunder become vested, with earlier expiration upon the Termination Date

     Vesting Schedule:

  Subject to the limitations set forth in this Notice, the Plan and the Performance Shares Agreement, the Shares will vest in accordance with the following schedule: [INSERT VESTING SCHEDULE]

You understand that your employment or consulting relationship or service with the Company is for an unspecified duration, can be terminated at any time (i.e., is “at-will”), and that nothing in this Notice, the Performance Shares Agreement or the Plan changes the at-will nature of that relationship. You acknowledge that the vesting pursuant to this Notice is earned only upon the applicable certification of attainment of the requisite Performance Factors enumerated above while still in service as an Employee, Director or Consultant of the Company. You also understand that this Notice is subject to the terms and conditions of both the Performance Shares Award Agreement and the Plan, both of which are incorporated herein by reference. You also have read both the Performance Shares Agreement and the Plan.

 

PARTICIPANT

     IMPERVA, INC.   

Signature:

         By:        

Print Name:

         Its:        

Date:

         Date:        


IMPERVA, INC.

2011 STOCK OPTION AND INCENTIVE PLAN

PERFORMANCE SHARES AGREEMENT

Unless otherwise defined herein, the terms defined in the Imperva, Inc. (the “ Company ”) 2011 Stock Option and Incentive Plan (the “ Plan ”) shall have the same defined meanings in this Performance Shares Agreement (the “ Agreement ”).

Participant has been granted a Performance Shares Award (“ Performance Shares Award ”) subject to the terms, restrictions and conditions of the Plan, the Notice of Performance Shares Award (“ Notice ”) and this Agreement.

1. Settlement . Performance Shares shall be settled in Shares and the Company’s transfer agent shall record ownership of such Shares in Participant’s name as soon as reasonably practicable after achievement of the Performance Factors enumerated in the Notice.

2. Stockholder Rights . Participant shall have no right to dividends or to vote Shares until Participant is recorded as the holder of such Shares on the stock records of the Company and its transfer agent.

3. No-Transfer . Participant’s interest in this Performance Shares Award shall not be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of.

4. Termination . Upon Participant’s Termination for any reason, all of Participant’s rights under the Plan, this Agreement and the Notice in respect of this Award shall immediately terminate. In case of any dispute as to whether Termination has occurred, the Committee shall have sole discretion to determine whether such Termination has occurred and the effective date of such Termination.

5. U.S. Tax Consequences . Participant acknowledges that there will be tax consequences upon issuance of the Shares, and Participant should consult a tax adviser regarding Participant’s tax obligations prior to such settlement or disposition. Upon vesting of the Shares, Participant will include in income the fair market value of the Shares. The included amount will be treated as ordinary income by Participant and will be subject to withholding by the Company when required by applicable law. Before any Shares subject to this Agreement are issued the Company shall withhold a number of Shares with a fair market value (determined on the date the Shares are issued) equal to the minimum amount the Company is required to withhold for income and employment taxes. Upon disposition of the Shares, any subsequent increase or decrease in value will be treated as short-term or long-term capital gain or loss, depending on whether the Shares are held for more than one year from the date of issuance.

6. Acknowledgement . The Company and Participant agree that the Performance Shares Award is granted under and governed by the Notice, this Agreement and by the provisions of the Plan (incorporated herein by reference). Participant: (a) acknowledges receipt of a copy of the Plan and the Plan prospectus, (b) represents that Participant has carefully read and is familiar with their provisions, and (c) hereby accepts the Performance Shares Award subject to all of the terms and conditions set forth herein and those set forth in the Plan, this Agreement and the Notice.

7. Entire Agreement; Enforcement of Rights . This Agreement, the Plan and the Notice constitute the entire agreement and understanding of the parties relating to the subject matter herein and supersede all prior discussions between them. Any prior agreements, commitments or negotiations concerning the purchase of the Shares hereunder are superseded. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing and signed by the parties to this Agreement. The

 

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failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.

8. Compliance with Laws and Regulations . The issuance of Shares will be subject to and conditioned upon compliance by the Company and Participant with all applicable state and federal laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Company’s Common Stock may be listed or quoted at the time of such issuance or transfer.

9. Governing Law; Severability . If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of this Agreement shall be interpreted as if such provision were so excluded and (c) the balance of this Agreement shall be enforceable in accordance with its terms. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law.

10. No Rights as Employee, Director or Consultant . Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a Parent or Subsidiary of the Company, to terminate Purchaser s service, for any reason, with or without cause.

By the signature on, or electronic acceptance of, the Notice by each of the Participant and the Company’s representative, Participant and the Company agree that this Performance Shares Award is granted under and governed by the terms and conditions of the Plan, the Notice and this Agreement. Participant has reviewed the Plan, the Notice and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement, and fully understands all provisions of the Plan, the Notice and this Agreement. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan, the Notice and this Agreement. Participant further agrees to notify the Company upon any change in Participant’s residence address.

 

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IMPERVA, INC.

2011 STOCK OPTION AND INCENTIVE PLAN

NOTICE OF STOCK APPRECIATION RIGHT AWARD

Unless otherwise defined herein, the terms defined in the Imperva, Inc. (the “ Company ”) 2011 Stock Option and Incentive Plan (the “ Plan ”) shall have the same meanings in this Notice of Stock Appreciation Right Award (the “ Notice ”).

 

    Name:

     

    Address:         

     

You (“ Participant ”) have been granted an award of Stock Appreciation Rights (“ SARs ”) of the Company under the Plan subject to the terms and conditions of the Plan, this Notice and the Stock Appreciation Right Award Agreement (the “ SAR Agreement ”).

 

     Date of Grant:

    
 

 

  

     Vesting Commencement Date:     

    
 

 

  

     Fair Market Value on Date of Grant:

    
 

 

  

     Total Number of Shares:

    
 

 

  

     Expiration Date:

    
 

 

  

     Post-Termination Exercise Period:

          Termination for Cause = None

        Voluntary Termination = 3 Months

        Termination without Cause = 3 Months

        Disability = 12 Months

        Death = 12 Months

  

    Vesting Schedule :

  Subject to the limitations set forth in this Notice, the Plan and the Stock Appreciation Right Agreement, the SAR will vest and may be exercised, in whole or in part, in accordance with the following schedule: [INSERT VESTING SCHEDULE]

You understand that your employment or consulting relationship or service with the Company is for an unspecified duration, can be terminated at any time (i.e., is “at-will”), and that nothing in this Notice, the SAR Agreement or the Plan changes the at-will nature of that relationship. You acknowledge that the vesting of the SARs pursuant to this Notice is earned only by continuing service as an Employee, Director or Consultant of the Company. You also understand that this Notice is subject to the terms and conditions of both the SAR Agreement and the Plan, both of which are incorporated herein by reference. You have read both the SAR Agreement and the Plan.

 

PARTICIPANT

      IMPERVA, INC.   

Signature:

           By:        

Print Name:

           Its:        

Date:

           Date:        


IMPERVA, INC.

2011 STOCK OPTION AND INCENTIVE PLAN

STOCK APPRECIATION RIGHT AWARD AGREEMENT

Unless otherwise defined herein, the terms defined in the Imperva, Inc. (the “ Company ”) 2011 Stock Option and Incentive Plan (the “ Plan ”) shall have the same meanings in this Stock Appreciation Right Award Agreement (the “ Agreement ”).

Participant has been granted Stock Appreciation Rights (“ SARs ”), subject to the terms and conditions of the Plan, the Notice of Stock Appreciation Right Award (the “ Notice ”) and this Agreement.

1. Vesting Rights . Subject to the applicable provisions of the Plan and this Agreement, this SAR may be exercised, in whole or in part, in accordance with the schedule set forth in the Notice.

2. Termination Period .

(a) General Rule . Except as provided below, and subject to the Plan, this SAR may be exercised for 3 months after Participant’s Termination. In no event shall this SAR be exercised later than the Expiration Date set forth in the Notice.

(b) Death; Disability . Unless provided otherwise in the Notice, upon Participant’s Termination by reason of his or her Disability or death, or if a Participant dies within three months of the Termination Date, this SAR may be exercised for twelve months, provided that in no event shall this SAR be exercised later than the Expiration Date set forth in the Notice.

(c) Cause . Upon Participant’s Termination for Cause, the SAR shall expire on such date of Participant’s Termination Date.

3. Grant of SAR . The Participant named in the Notice has been granted a SAR for the number of Shares set forth in the Notice at the fair market value set forth in the Notice. In the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Agreement, the terms and conditions of the Plan shall prevail.

4. Exercise of SAR .

(a) Right to Exercise . This SAR is exercisable during its term in accordance with the Vesting Schedule set forth in the Notice and the applicable provisions of the Plan and this Agreement. In the event of Participant’s death, Disability, Termination for Cause or other Termination, the exercisability of the SAR is governed by the applicable provisions of the Plan, the Notice and this Agreement.

(b) Method of Exercise . This SAR is exercisable by delivery of an exercise notice (the “ Exercise Notice ”), which shall state the election to exercise the SAR, the number of SARS to be exercised (the “ Exercised SARs ”), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be delivered in person, by mail, via electronic mail or facsimile or by other authorized method to the Secretary of the Company or other person designated by the Company. This SAR shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice.

(c) No Shares shall be issued pursuant to the exercise of this SAR unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange or quotation service upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Participant on the date the SAR is exercised with respect to such Exercised Shares.

 

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5. Non-Transferability of SAR . This SAR may not be transferred in any manner other than by will or by the laws of descent or distribution or court order and may be exercised during the lifetime of Participant only by the Participant unless otherwise permitted by the Committee on a case-by-case basis. The terms of the Plan and this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Participant.

6. Term of SAR . This SAR shall in any event expire on the expiration date set forth in the Notice, which date is 10 years after the Date of Grant.

7. U.S. Tax Consequences . For Participants subject to U.S. income tax, some of the federal tax consequences relating to this SAR, as of the date of this SAR, are set forth below. All other Participants should consult a tax advisor for tax consequences relating to this SAR in their respective jurisdiction. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE PARTICIPANT SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS SAR. The Participant will incur federal ordinary income tax liability upon exercise of the SAR. The Participant will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their Fair Market Value on the date of grant. If the Participant is an Employee or a former Employee, the Company will be required to withhold from his or her compensation an amount equal to the minimum amount the Company is required to withhold for income and employment taxes or collect from Participant and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. If the Participant holds the Shares received upon exercise of the SAR for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes.

8. Acknowledgement . The Company and Participant agree that the SAR is granted under and governed by the Notice, this Agreement and the provisions of the Plan (incorporated herein by reference). Participant: (a) acknowledges receipt of a copy of the Plan and the Plan prospectus, (b) represents that Participant has carefully read and is familiar with their provisions, and (c) hereby accepts the SAR subject to all of the terms and conditions set forth herein and those set forth in the Plan and the Notice.

9. Entire Agreement; Enforcement of Rights . This Agreement, the Plan and the Notice constitute the entire agreement and understanding of the parties relating to the subject matter herein and supersede all prior discussions between them. Any prior agreements, commitments or negotiations concerning the purchase of the Shares hereunder are superseded. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing and signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.

10. Compliance with Laws and Regulations . The issuance of Shares will be subject to and conditioned upon compliance by the Company and Participant with all applicable state and federal laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Company’s Common Stock may be listed or quoted at the time of such issuance or transfer.

11. Governing Law; Severability . If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of this Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of this Agreement shall be enforceable in accordance with its terms. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the

 

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parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law.

12. No Rights as Employee, Director or Consultant . Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a Parent or Subsidiary of the Company, to terminate Participant’s service, for any reason, with or without cause.

By the signature on, or electronic acceptance of, the Notice by each of the Participant and the Company’s representative, Participant and the Company agree that this SAR is granted under and governed by the terms and conditions of the Plan, the Notice and this Agreement. Participant has reviewed the Plan, the Notice and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing or electronically accepting the Notice, and fully understands all provisions of the Plan, the Notice and this Agreement. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan, the Notice and the Agreement. Participant further agrees to notify the Company upon any change in the residence address indicated on the Notice.

 

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IMPERVA, INC.

2011 STOCK OPTION AND INCENTIVE PLAN

NOTICE OF STOCK OPTION GRANT

Unless otherwise defined herein, the terms defined in the Imperva, Inc. (the “ Company ”) 2011 Stock Option and Incentive Plan (the “ Plan ”) shall have the same meanings in this Notice of Stock Option Grant (the “ Notice ”).

 

    Name:

     

    Address:         

     

You (“ Participant ”) have been granted an option to purchase shares of Common Stock of the Company under the Plan subject to the terms and conditions of the Plan, this Notice and the Stock Option Award Agreement (the “ Option Agreement ”).

 

     Date of Grant:

    
 

 

  

     Vesting Commencement Date:     

    
 

 

  

     Exercise Price per Share :

    
 

 

  

     Total Number of Shares:

    
 

 

  

     Type of Option :

       Non-Qualified Stock Option (              shares)
       Incentive Stock Option (              shares)

     Expiration Date :

    
 

 

  

    Post-Termination Exercise Period:

                  Termination for Cause = None

                Voluntary Termination = 3 Months

                Termination without Cause = 3 Months

                Disability = 12 Months

                Death = 12 Months

     Vesting Schedule:

  Subject to the limitations set forth in this Notice, the Plan and the Option Agreement, the Option will vest and may be exercised, in whole or in part, in accordance with the following schedule: [INSERT VESTING SCHEDULE]

You understand that your employment or consulting relationship or service with the Company is for an unspecified duration, can be terminated at any time (i.e., is “at-will”), and that nothing in this Notice, the Option Agreement or the Plan changes the at-will nature of that relationship. You acknowledge that the vesting of the Options pursuant to this Notice is earned only by continuing service as an Employee, Director or Consultant of the Company. You also understand that this Notice is subject to the terms and conditions of both the Option Agreement and the Plan, both of which are incorporated herein by reference. You have read both the Option Agreement and the Plan.

 

PARTICIPANT :     IMPERVA, INC.
Signature:         By:    
Print Name:          Its:    
Date:         Date:     

 


IMPERVA, INC.

2011 STOCK OPTION AND INCENTIVE PLAN

STOCK OPTION AWARD AGREEMENT

Unless otherwise defined herein, the terms defined in the Imperva, Inc. (the “ Company ”) 2011 Stock Option and Incentive Plan (the “ Plan ”) shall have the same defined meanings in this Stock Option Award Agreement (the “ Agreement ”).

Participant has been granted an option to purchase Shares (the “ Option ”), subject to the terms and conditions of the Plan, the Notice of Stock Option Grant (the “ Notice ”) and this Agreement.

1. Vesting Rights . Subject to the applicable provisions of the Plan and this Agreement, this Option may be exercised, in whole or in part, in accordance with the schedule set forth in the Notice.

2. Termination Period .

(a) General Rule . Except as provided below, and subject to the Plan, this Option may be exercised for 3 months after Participant’s Termination with the Company. In no event shall this Option be exercised later than the Expiration Date set forth in the Notice.

(b) Death; Disability . Unless provided otherwise in the Notice, upon Participant’s Termination by reason of his or her Disability or death, or if a Participant dies within three months of the Termination Date, this Option may be exercised for twelve months, provided that in no event shall this Option be exercised later than the Expiration Date set forth in the Notice.

(c) Cause . Upon Participant’s Termination for Cause, the Option shall expire on such date of Participant’s Termination Date.

3. Grant of Option . The Participant named in the Notice has been granted an Option for the number of Shares set forth in the Notice at the exercise price per Share set forth in the Notice (the “ Exercise Price ”). In the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice as an Incentive Stock Option (“ ISO ”), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an ISO, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonqualified Stock Option (“ NSO ”).

4. Exercise of Option .

(a) Right to Exercise . This Option is exercisable during its term in accordance with the Vesting Schedule set forth in the Notice and the applicable provisions of the Plan and this Agreement. In the event of Participant’s death, Disability, Termination for Cause or other Termination, the exercisability of the Option is governed by the applicable provisions of the Plan, the Notice and this Agreement.

(b) Method of Exercise . This Option is exercisable by delivery of an exercise notice (the “ Exercise Notice ”), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the “ Exercised Shares ”), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be delivered in person, by mail, via electronic mail or facsimile or by other authorized method to the Secretary of the Company or other person designated by the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

 

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(c) No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange or quotation service upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Participant on the date the Option is exercised with respect to such Exercised Shares.

5. Method of Payment . Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Participant:

(a) cash;

(b) check;

(c) a “broker-assisted” or “same-day sale” (as described in Section 11(d) of the Plan); or

(d) other method authorized by the Company.

6. Non-Transferability of Option . This Option may not be transferred in any manner other than by will or by the laws of descent or distribution or court order and may be exercised during the lifetime of Participant only by the Participant unless otherwise permitted by the Committee on a case-by-case basis. The terms of the Plan and this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Participant.

7. Term of Option . This Option shall in any event expire on the expiration date set forth in the Notice, which date is 10 years after the Date of Grant (five years after the Date of Grant if this option is designated as an ISO in the Notice of Stock Option Grant and Section 5.3 of the Plan applies).

8. U.S. Tax Consequences . For Participants subject to U.S. income tax, some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. All other Participants should consult a tax advisor for tax consequences relating to this Option in their respective jurisdiction. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE PARTICIPANT SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

(a) Exercising the Option .

(i) Nonqualified Stock Option . The Participant may incur federal ordinary income tax liability upon exercise of a NSO. The Participant will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Participant is an Employee or a former Employee, the Company will be required to withhold from his or her compensation an amount equal to the minimum amount the Company is required to withhold for income and employment taxes or collect from Participant and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.

(ii) Incentive Stock Option . If this Option qualifies as an ISO, the Participant will have no regular federal income tax liability upon its exercise, although the excess, if any, of the aggregate Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Participant to alternative minimum tax in the year of exercise.

 

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(b) Disposition of Shares .

(i) NSO . If the Participant holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes.

(ii) ISO . If the Participant holds ISO Shares for at least one year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Participant disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price.

(c) Notice of Disqualifying Disposition of ISO Shares . If the Participant sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Participant shall immediately notify the Company in writing of such disposition. The Participant agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Participant.

9. Acknowledgement . The Company and Participant agree that the Option is granted under and governed by the Notice, this Agreement and by the provisions of the Plan (incorporated herein by reference). Participant: (a) acknowledges receipt of a copy of the Plan and the Plan prospectus, (b) represents that Participant has carefully read and is familiar with their provisions, and (c) hereby accepts the Option subject to all of the terms and conditions set forth herein and those set forth in the Plan and the Notice.

10. Entire Agreement; Enforcement of Rights . This Agreement, the Plan and the Notice constitute the entire agreement and understanding of the parties relating to the subject matter herein and supersede all prior discussions between them. Any prior agreements, commitments or negotiations concerning the purchase of the Shares hereunder are superseded. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing and signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.

11. Compliance with Laws and Regulations . The issuance of Shares will be subject to and conditioned upon compliance by the Company and Participant with all applicable state and federal laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Company’s Common Stock may be listed or quoted at the time of such issuance or transfer.

12. Governing Law; Severability . If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of this Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of this Agreement shall be enforceable in accordance with its terms. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law.

13. No Rights as Employee, Director or Consultant . Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a Parent or Subsidiary of the Company, to terminate Participant’s service, for any reason, with or without cause.

 

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By the signature on, or electronic acceptance of, the Notice by each of the Participant and the Company’s representative, Participant and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan, the Notice and this Agreement. Participant has reviewed the Plan, the Notice and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing the Notice, and fully understands all provisions of the Plan, the Notice and this Agreement. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan, the Notice and the Agreement. Participant further agrees to notify the Company upon any change in the residence address indicated on the Notice.

 

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IMPERVA, INC.

2011 STOCK OPTION AND INCENTIVE PLAN

NOTICE OF STOCK BONUS AWARD

Unless otherwise defined herein, the terms defined in the Imperva, Inc. (the “ Company ”) 2011 Stock Option and Incentive Plan (the “ Plan ”) shall have the same meanings in this Notice of Stock Bonus Award (the “ Notice ”).

 

    Name:

     

    Address:         

     

You (“ Participant ”) have been granted an award of Shares under the Plan subject to the terms and conditions of the Plan, this Notice, and the attached Stock Bonus Award Agreement (the “ Stock Bonus Agreement ”) to the Plan.

 

    Number of Shares:

     
  

 

  

     Date of Grant:

     
  

 

  

     Vesting Commencement Date:     

     
  

 

  

     Expiration Date:

   The date on which all the Shares granted hereunder become vested, with earlier expiration upon the Termination Date

     Vesting Schedule:

   Subject to the limitations set forth in this Notice, the Plan and the Stock Bonus Agreement, the Shares will vest in accordance with the following schedule: [INSERT VESTING SCHEDULE]

You understand that your employment or consulting relationship or service with the Company is for an unspecified duration, can be terminated at any time (i.e., is “at-will”), and that nothing in this Notice, the Stock Bonus Agreement or the Plan changes the at-will nature of that relationship. You acknowledge that the vesting of the Shares pursuant to this Notice is earned only by continuing service as an Employee, Director or Consultant of the Company. You also understand that this Notice is subject to the terms and conditions of both the Stock Bonus Agreement and the Plan, both of which are incorporated herein by reference. You have read both the Stock Bonus Agreement and the Plan.

 

PARTICIPANT     IMPERVA, INC.
Signature:         By:    
Print Name:         Its:    
Date:         Date:    


IMPERVA, INC.

2011 STOCK OPTION AND INCENTIVE PLAN

STOCK BONUS AWARD AGREEMENT

Unless otherwise defined herein, the terms defined in the Imperva, Inc. (the “ Company ”) 2011 Stock Option and Incentive Plan (the “ Plan ”) shall have the same defined meanings in this Stock Bonus Agreement (the “ Agreement ”).

Participant has been granted a Stock Bonus Award (“ Stock Bonus Award ”) subject to the terms, restrictions and conditions of the Plan, the Notice of Stock Bonus Award (the “ Notice ”) and this Agreement.

1. Issuance . Stock Bonus Awards shall be issued in Shares, and the Company’s transfer agent shall record ownership of such Shares in Participant’s name as soon as reasonably practicable.

2. Stockholder Rights . Participant shall have no right to dividends or to vote Shares until Participant is recorded as the holder of such Shares on the stock records of the Company and its transfer agent.

3. No-Transfer . Unvested Shares, and unvested Stock Bonus Awards, and any interest in either shall not be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of by Participant or any person whose interest derives from Participant’s interest. “ Unvested Shares ” are Shares that have not yet vested pursuant to the terms of the vesting schedule set forth in the Notice.

4. Termination . Upon Participant’s Termination for any reason, all Unvested Shares shall immediately be forfeited to the Company, and all rights of Participant to such Unvested Shares shall immediately terminate as of Participant’s Termination Date. In case of any dispute as to whether Termination has occurred, the Committee shall have sole discretion to determine whether such Termination has occurred and the effective date of such Termination.

5. U.S. Tax Consequences . Upon vesting of Shares, Participant will include in taxable income the difference between the fair market value of the vesting Shares, as determined on the date of their vesting, and the price paid for the Shares. This will be treated as ordinary income by Participant and will be subject to withholding by the Company when required by applicable law. Before any Shares subject to this Agreement are issued the Company shall withhold a number of Shares with a fair market value (determined on the date the Shares are issued) equal to the minimum amount the Company is required to withhold for income and employment taxes. Upon disposition of the Shares, any subsequent increase or decrease in value will be treated as short-term or long-term capital gain or loss, depending on whether the Shares are held for more than one year from the date of settlement.

6. Acknowledgement . The Company and Participant agree that the Stock Bonus Award is granted under and governed by the Notice, this Agreement and by the provisions of the Plan (incorporated herein by reference). Participant: (a) acknowledges receipt of a copy of the Plan and the Plan prospectus, (b) represents that Participant has carefully read and is familiar with their provisions, and (c) hereby accepts the Stock Bonus Award subject to all of the terms and conditions set forth herein and those set forth in the Plan, this Agreement and the Notice.

7. Entire Agreement; Enforcement of Rights . This Agreement, the Plan and the Notice constitute the entire agreement and understanding of the parties relating to the subject matter herein and supersede all prior discussions between them. Any prior agreements, commitments or negotiations concerning the purchase of the Shares hereunder are superseded. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing and signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.

 

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8. Compliance with Laws and Regulations . The issuance of Shares will be subject to and conditioned upon compliance by the Company and Participant with all applicable state and federal laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Company’s Common Stock may be listed or quoted at the time of such issuance or transfer.

9. Governing Law; Severability . If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of this Agreement shall be interpreted as if such provision were so excluded, and (c) the balance of this Agreement shall be enforceable in accordance with its terms. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law.

10. No Rights as Employee, Director or Consultant . Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a Parent or Subsidiary of the Company, to terminate Purchaser s service, for any reason, with or without cause.

By the signature on, or electronic acceptance of, the Notice by each of the Participant and the Company’s representative, Participant and the Company agree that this Stock Bonus Award is granted under and governed by the terms and conditions of the Plan, the Notice and this Agreement. Participant has reviewed the Plan, the Notice and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement, and fully understands all provisions of the Plan, the Notice and this Agreement. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan, the Notice and this Agreement. Participant further agrees to notify the Company upon any change in Participant’s residence address.

 

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IMPERVA, INC.

2011 STOCK OPTION AND INCENTIVE PLAN

NOTICE OF RESTRICTED STOCK UNIT AWARD

Unless otherwise defined herein, the terms defined in the Imperva, Inc. (the “ Company ”) 2011 Stock Option and Incentive Plan (the “ Plan ”) shall have the same meanings in this Notice of Restricted Stock Unit Award (the “ Notice ”).

 

    Name:

     

    Address:         

     

You (“ Participant ”) have been granted an award of Restricted Stock Units (“ RSUs ”) under the Plan subject to the terms and conditions of the Plan, this Notice and the attached Award Agreement (Restricted Stock Units) (hereinafter “ RSU Agreement ”).

 

     Number of RSUs:

     
  

 

  

     Date of Grant:

     
  

 

  

     Vesting Commencement Date:

     
  

 

  

     Expiration Date:

   The date on which settlement of all RSUs granted hereunder occurs, with earlier expiration upon the Termination Date

     Vesting Schedule:

   Subject to the limitations set forth in this Notice, the Plan and the RSU Agreement, the RSUs will vest in accordance with the following schedule: [INSERT VESTING SCHEDULE]

You understand that your employment or consulting relationship or service with the Company is for an unspecified duration, can be terminated at any time (i.e., is “at-will”), and that nothing in this Notice, the RSU Agreement or the Plan changes the at-will nature of that relationship. You acknowledge that the vesting of the RSUs pursuant to this Notice is earned only by continuing service as an Employee, Director or Consultant of the Company. You also understand that this Notice is subject to the terms and conditions of both the RSU Agreement and the Plan, both of which are incorporated herein by reference. You have read both the RSU Agreement and the Plan.

 

PARTICIPANT     IMPERVA, INC.
Signature:         By:    
Print Name:         Its:    
Date:         Date:    

 


IMPERVA, INC.

2011 STOCK OPTION AND INCENTIVE PLAN

AWARD AGREEMENT (RESTRICTED STOCK UNITS)

Unless otherwise defined herein, the terms defined in the Imperva, Inc. (the “ Company ”) 2011 Stock Option and Incentive Plan (the “ Plan ”) shall have the same defined meanings in this Award Agreement (Restricted Stock Units) (the “ Agreement ”).

Participant has been granted Restricted Stock Units (“ RSUs ”) subject to the terms, restrictions and conditions of the Plan, the Notice of Restricted Stock Unit Award (the “ Notice ”) and this Agreement.

1. Settlement . Settlement of RSUs shall be made within 30 days following the applicable date of vesting under the vesting schedule set forth in the Notice. Settlement of RSUs shall be in Shares.

2. No Stockholder Rights . Unless and until such time as Shares are issued in settlement of vested RSUs, Participant shall have no ownership of the Shares allocated to the RSUs and shall have no right dividends or to vote such Shares.

3. Dividend Equivalents . Dividends, if any (whether in cash or Shares), shall not be credited to Participant.

4. No Transfer . The RSUs and any interest therein shall not be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of.

5. Termination . If Participant’s service Terminates for any reason, all unvested RSUs shall be forfeited to the Company forthwith, and all rights of Participant to such RSUs shall immediately terminate. In case of any dispute as to whether Termination has occurred, the Committee shall have sole discretion to determine whether such Termination has occurred and the effective date of such Termination.

6. U.S. Tax Consequences . Participant acknowledges that there will be tax consequences upon settlement of the RSUs or disposition of the Shares, if any, received in connection therewith, and Participant should consult a tax adviser regarding Participant’s tax obligations prior to such settlement or disposition. Upon vesting of the RSU, Participant will include in income the fair market value of the Shares subject to the RSU. The included amount will be treated as ordinary income by Participant and will be subject to withholding by the Company when required by applicable law. Upon disposition of the Shares, any subsequent increase or decrease in value will be treated as short-term or long-term capital gain or loss, depending on whether the Shares are held for more than one year from the date of settlement. Further, an RSU may be considered a deferral of compensation that may be subject to Section 409A of the Code. Section 409A of the Code imposes special rules to the timing of making and effecting certain amendments of this RSU with respect to distribution of any deferred compensation. You should consult your personal tax advisor for more information on the actual and potential tax consequences of this RSU.

7. Acknowledgement . The Company and Participant agree that the RSUs are granted under and governed by the Notice, this Agreement and the provisions of the Plan. Participant: (a) acknowledges receipt of a copy of the Plan and the Plan prospectus, (b) represents that Participant has carefully read and is familiar with their provisions, and (c) hereby accepts the RSUs subject to all of the terms and conditions set forth herein and those set forth in the Plan and the Notice.

8. Entire Agreement; Enforcement of Rights . This Agreement, the Plan and the Notice constitute the entire agreement and understanding of the parties relating to the subject matter herein and supersede all prior discussions between them. Any prior agreements, commitments or negotiations concerning the purchase of the Shares hereunder are superseded. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing and signed by the parties to this Agreement. The

 

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failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.

9. Compliance with Laws and Regulations . The issuance of Shares will be subject to and conditioned upon compliance by the Company and Participant with all applicable state and federal laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Company’s Common Stock may be listed or quoted at the time of such issuance or transfer.

10. Governing Law; Severability . If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of this Agreement shall be interpreted as if such provision were so excluded and (c) the balance of this Agreement shall be enforceable in accordance with its terms. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law.

11. No Rights as Employee, Director or Consultant . Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a Parent or Subsidiary of the Company, to terminate Participant s service, for any reason, with or without cause.

By the signature on, or electronic acceptance of, the Notice by each of the Participant and the Company’s representative, Participant and the Company agree that this RSU is granted under and governed by the terms and conditions of the Plan, the Notice and this Agreement. Participant has reviewed the Plan, the Notice and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement, and fully understands all provisions of the Plan, the Notice and this Agreement. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan, the Notice and this Agreement. Participant further agrees to notify the Company upon any change in Participant’s residence address.

 

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IMPERVA, INC.

2011 STOCK OPTION AND INCENTIVE PLAN

NOTICE OF RESTRICTED STOCK AWARD

Unless otherwise defined herein, the terms defined in the Imperva, Inc. (the “ Company ”) 2011 Stock Option and Incentive Plan (the “ Plan ”) shall have the same meanings in this Notice of Restricted Stock Award (the “ Notice ”).

 

    Name:

     

    Address:         

     

You (“ Participant ”) have been granted an award of Restricted Shares of Common Stock of Imperva, Inc. (the “ Company ”) under the Plan subject to the terms and conditions of the Plan, this Notice and the attached Restricted Stock Agreement (the “ Restricted Stock Purchase Agreement ”).

 

     Total Number of Restricted Shares Awarded :    
     Fair Market Value per Restricted Share :   $    
     Total Fair Market Value of Award :   $    

     Purchase Price per Restricted Share :

  $    

     Total Purchase Price for all Restricted Shares :  

  $    
     Date of Grant :        
     Vesting Commencement Date :    
     Vesting Schedule: Subject to the limitations set forth in this Notice, the Plan and the Restricted Stock Purchase Agreement, the Restricted Shares will vest and the right of repurchase shall lapse, in whole or in part, in accordance with the following schedule: [INSERT VESTING SCHEDULE]

You understand that your employment or consulting relationship with the Company is for an unspecified duration, can be terminated at any time (i.e., is “at-will”), and that nothing in this Notice, the Restricted Stock Agreement or the Plan changes the at-will nature of that relationship. You acknowledge that the vesting of the Restricted Shares pursuant to this Notice is earned only by continuing service as an Employee, Director or Consultant of the Company. You also understand that this Notice is subject to the terms and conditions of both the Restricted Stock Agreement and the Plan, both of which are incorporated herein by reference. You have read both the Restricted Stock Agreement and the Plan. If the Restricted Stock Purchase Agreement is not executed or accepted electronically by you within thirty (30) days of the Date of Grant above, then this grant shall be void.

 

RECIPIENT     IMPERVA, INC.
Signature:         By:    
Print Name:         Its:    
Date:         Date:    

 


IMPERVA, INC.

2011 STOCK OPTION AND INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT

THIS RESTRICTED STOCK AGREEMENT (this “ Agreement ”) is made as of          , 20      by and between Imperva, Inc., a Delaware corporation (the “ Company ”), and                  (“ Participant ”) pursuant to the Company’s 2011 Stock Option and Incentive Plan (the “ Plan ”). Unless otherwise defined herein, the terms defined in the Plan shall have the same meanings in this Agreement.

1. Sale of Stock . Subject to the terms and conditions of this Agreement, on the Purchase Date (as defined below) the Company will issue and sell to Participant, and Participant agrees to purchase from the Company the number of Shares shown on the Notice of Restricted Stock Award (the “ Notice ”) at a purchase price of $              per Share. The per Share purchase price of the Shares shall be not less than the par value of the Shares as of the date of the offer of such Shares to the Participant. The term “Shares” refers to the purchased Shares and all securities received in replacement of or in connection with the Shares pursuant to stock dividends or splits, all securities received in replacement of the Shares in a recapitalization, merger, reorganization, exchange or the like, and all new, substituted or additional securities or other properties to which Participant is entitled by reason of Participant’s ownership of the Shares.

2. Time and Place of Purchase . The purchase and sale of the Shares under this Agreement shall occur at the principal office of the Company simultaneously with the execution of this Agreement by the parties, or on such other date as the Company and Participant shall agree (the “ Purchase Date ”). On the Purchase Date, the Company will issue in Participant’s name a stock certificate representing the Shares to be purchased by Participant against payment of the purchase price therefor by Participant by (a) check made payable to the Company, (b) cancellation of indebtedness of the Company to Participant, (c) Participant’s personal services that the Committee has determined have already been rendered to the Company and have a value not less than aggregate par value of the Shares to be issued Participant, or (d) a combination of the foregoing.

3. Restrictions on Resale . By signing this Agreement, Participant agrees not to sell any Shares acquired pursuant to the Plan and this Agreement at a time when applicable laws, regulations or Company or underwriter trading policies prohibit exercise or sale. This restriction will apply as long as Participant is providing service to the Company or a Subsidiary of the Company.

3.1 Repurchase Right on Termination Other Than for Cause . For the purposes of this Agreement, a “ Repurchase Event ” shall mean an occurrence of one of the following:

(i) termination of Participant’s service, whether voluntary or involuntary and with or without cause;

(ii) resignation, retirement or death of Participant; or

(iii) any attempted transfer by Participant of the Shares, or any interest therein, in violation of this Agreement.

Upon the occurrence of a Repurchase Event, the Company shall have the right (but not an obligation) to purchase the Shares of Participant at a price equal to the Purchase Price per Share (the “ Repurchase Right ”). The Repurchase Right shall lapse in accordance with the vesting schedule set forth in the

 

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Notice. For purposes of this Agreement, “ Unvested Shares ” means Stock pursuant to which the Company’s Repurchase Right has not lapsed.

3.2 Exercise of Repurchase Right . Unless the Company provides written notice to Participant within 90 days from the date of termination of Participant’s service to the Company that the Company does not intend to exercise its Repurchase Right with respect to some or all of the Unvested Shares, the Repurchase Right shall be deemed automatically exercised by the Company as of the 90th day following such termination, provided that the Company may notify Participant that it is exercising its Repurchase Right as of a date prior to such 90th day. Unless Participant is otherwise notified by the Company pursuant to the preceding sentence that the Company does not intend to exercise its Repurchase Right as to some or all of the Unvested Shares, execution of this Agreement by Participant constitutes written notice to Participant of the Company’s intention to exercise its Repurchase Right with respect to all Unvested Shares to which such Repurchase Right applies at the time of Termination of Participant. The Company, at its choice, may satisfy its payment obligation to Participant with respect to exercise of the Repurchase Right by either (a) delivering a check to Participant in the amount of the purchase price for the Unvested Shares being repurchased, or (b) in the event Participant is indebted to the Company, canceling an amount of such indebtedness equal to the purchase price for the Unvested Shares being repurchased, or (c) by a combination of (a) and (b) so that the combined payment and cancellation of indebtedness equals such purchase price. In the event of any deemed automatic exercise of the Repurchase Right by canceling an amount of such indebtedness equal to the purchase price for the Unvested Shares being repurchased, such cancellation of indebtedness shall be deemed automatically to occur as of the 90th day following termination of Participant’s employment or consulting relationship unless the Company otherwise satisfies its payment obligations. As a result of any repurchase of Unvested Shares pursuant to the Repurchase Right, the Company shall become the legal and beneficial owner of the Unvested Shares being repurchased and shall have all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of Unvested Shares being repurchased by the Company, without further action by Participant.

3.3 Acceptance of Restrictions . Acceptance of the Shares shall constitute Participant’s agreement to such restrictions and the legending of his or her certificates with respect thereto. Notwithstanding such restrictions, however, so long as Participant is the holder of the Shares, or any portion thereof, he or she shall be entitled to receive all dividends declared on and to vote the Shares and to all other rights of a stockholder with respect thereto.

3.4 Non-Transferability of Unvested Shares . In addition to any other limitation on transfer created by applicable securities laws or any other agreement between the Company and Participant, Participant may not transfer any Unvested Shares, or any interest therein, unless consented to in writing by a duly authorized representative of the Company. Any purported transfer is void and of no effect, and no purported transferee thereof will be recognized as a holder of the Unvested Shares for any purpose whatsoever. Should such a transfer purport to occur, the Company may refuse to carry out the transfer on its books, set aside the transfer, or exercise any other legal or equitable remedy. In the event the Company consents to a transfer of Unvested Shares, all transferees of Shares or any interest therein will receive and hold such Shares or interest subject to the provisions of this Agreement, including, insofar as applicable, the Repurchase Right. In the event of any purchase by the Company hereunder where the Shares or interest are held by a transferee, the transferee shall be obligated, if requested by the Company, to transfer the Shares or interest to the Participant for consideration equal to the amount to be paid by the Company hereunder. In the event the Repurchase Right is deemed exercised by the Company, the Company may deem any transferee to have transferred the Shares or interest to Participant prior to their purchase by the Company, and payment of the purchase price by the Company to such transferee shall be deemed to satisfy Participant’s obligation to pay such transferee for such Shares or interest, and also to satisfy the Company’s obligation to pay Participant for such Shares or interest.

 

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3.5 Assignment . The Repurchase Right may be assigned by the Company in whole or in part to any persons or organization.

4. Restrictive Legends and Stop Transfer Orders .

4.1 Legends . The certificate or certificates representing the Shares shall bear the following legend (as well as any legends required by applicable state and federal corporate and securities laws):

THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

4.2 Stop-Transfer Notices . Participant agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.

4.3 Refusal to Transfer . The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as the owner or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.

5. No Rights as Employee, Director or Consultant . Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a Parent or Subsidiary of the Company, to terminate Participant s service, for any reason, with or without cause.

6. Miscellaneous .

6.1 Acknowledgement . The Company and Participant agree that the Restricted Shares are granted under and governed by the Notice, this Agreement and by the provisions of the Plan (incorporated herein by reference). Participant: (a) acknowledges receipt of a copy of the Plan and the Plan prospectus, (b) represents that Participant has carefully read and is familiar with their provisions, and (c) hereby accepts the Restricted Shares subject to all of the terms and conditions set forth herein and those set forth in the Plan and the Notice.

6.2 Entire Agreement; Enforcement of Rights . This Agreement, the Plan and the Notice constitute the entire agreement and understanding of the parties relating to the subject matter herein and supersede all prior discussions between them. Any prior agreements, commitments or negotiations concerning the purchase of the Shares hereunder are superseded. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing and signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.

6.3 Compliance with Laws and Regulations . The issuance of Shares will be subject to and conditioned upon compliance by the Company and Participant with all applicable state and federal laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Company’s Common Stock may be listed or quoted at the time of such issuance or transfer.

 

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6.4 Governing Law; Severability . If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of this Agreement shall be interpreted as if such provision were so excluded and (c) the balance of this Agreement shall be enforceable in accordance with its terms. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law.

6.5 Construction . This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto.

6.6 Notices . Any notice to be given under the terms of the Plan shall be addressed to the Company in care of its principal office, and any notice to be given to the Participant shall be addressed to such Participant at the address maintained by the Company for such person or at such other address as the Participant may specify in writing to the Company.

6.7 Counterparts . This Agreement may be executed in two or more counterparts, each of which shall he deemed an original and all of which together shall constitute one instrument.

6.8 U.S. Tax Consequences . Upon vesting of Shares, Participant will include in taxable income the difference between the fair market value of the vesting Shares, as determined on the date of their vesting, and the price paid for the Shares. This will be treated as ordinary income by Participant and will be subject to withholding by the Company when required by applicable law. In the absence of an Election (defined below), the Company shall withhold a number of vesting Shares with a fair market value (determined on the date of their vesting) equal to the minimum amount the Company is required to withhold for income and employment taxes. If Participant makes an Election, then Participant must, prior to making the Election, pay in cash (or check) to the Company an amount equal to the amount the Company is required to withhold for income and employment taxes.

7. Section 83(b) Election . Participant hereby acknowledges that he or she has been informed that, with respect to the purchase of the Shares, an election may be filed by the Participant with the Internal Revenue Service, within 30 days of the purchase of the Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase (the “ Election ”). Making the Election will result in recognition of taxable income to the Participant on the date of purchase, measured by the excess, if any, of the Fair Market Value of the Shares over the purchase price for the Shares. Absent such an Election, taxable income will be measured and recognized by Participant at the time or times on which the Company’s Repurchase Right lapses. Participant is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election. PARTICIPANT ACKNOWLEDGES THAT IT IS SOLELY PARTICIPANT’S RESPONSIBILITY, AND NOT THE COMPANY’S RESPONSIBILITY, TO TIMELY FILE THE ELECTION UNDER SECTION 83(b) OF THE CODE, EVEN IF PARTICIPANT REQUESTS THE COMPANY, OR ITS REPRESENTATIVE, TO MAKE THIS FILING ON PARTICIPANT’S BEHALF.

 

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The parties have executed or electronically accepted this Agreement as of the date first set forth above.

 

IMPERVA, INC.
By:     
Its:     

 

RECIPIENT:

Signature     

 

Please Print Name      

 

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RECEIPT

Imperva, Inc. hereby acknowledges receipt of (check as applicable):

¨ A check in the amount of $                 

¨ The cancellation of indebtedness in the amount of $                 

given by                  as consideration for Certificate No. -                  for                  shares of Common Stock of Imperva, Inc.

Dated:                     

 

IMPERVA, INC.
By:     
Its:     

 


RECEIPT AND CONSENT

The undersigned Participant hereby acknowledges receipt of a photocopy of Certificate No. -                      for                  shares of Common Stock of Imperva, Inc. (the “ Company ”)

The undersigned further acknowledges that the Secretary of the Company, or his or her designee, is acting as escrow holder pursuant to the Restricted Stock Agreement that Participant has previously entered into with the Company. As escrow holder, the Secretary of the Company, or his or her designee, holds the original of the aforementioned certificate issued in the undersigned’s name. To facilitate any transfer of Shares to the Company pursuant to the Restricted Stock Agreement, Participant has executed the attached Assignment Separate from Certificate.

Dated:                      , 20         

 

Signature:     

 

Please Print Name :      

 


STOCK POWER AND ASSIGNMENT

SEPARATE FROM STOCK CERTIFICATE

FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Agreement dated as of                      ,                      , [ COMPLETE AT THE TIME OF PURCHASE ] (the “ Agreement ”), the undersigned Participant hereby sells, assigns and transfers unto                      ,                  shares of the Common Stock $0.0001, par value per share, of Imperva, Inc., a Delaware corporation (the “ Company ”), standing in the undersigned’s name on the books of the Company represented by Certificate No(s).                                       [ COMPLETE AT THE TIME OF PURCHASE ] delivered herewith, and does hereby irrevocably constitute and appoint the Secretary of the Company as the undersigned’s attorney-in-fact, with full power of substitution, to transfer said stock on the books of the Company. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND ANY EXHIBITS THERETO.

Dated:                      ,         

 

  PARTICIPANT
   
  (Signature)
   
  (Please Print Name)

Instructions to Participant : Please do not fill in any blanks other than the signature line. The purpose of this document is to enable the Company and/or its assignee(s) to acquire the shares upon exercise of its “Repurchase Right” set forth in the Agreement without requiring additional action by the Participant.

 

EXHIBIT 10.4

[AMENDED AND RESTATED] 1 INDEMNIFICATION AGREEMENT

This [Amended and Restated] Indemnification Agreement (“ Agreement ”) is made as of              by and between Imperva, Inc., a Delaware corporation (the “ Company ”), and              (“ Indemnitee ”).

RECITALS

WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and its Subsidiaries and Enterprises (each as defined below);

WHEREAS, in order to induce Indemnitee to provide or continue to provide services to the Company and/or its Subsidiaries or Enterprises, the Company wishes to provide for the indemnification of, and advancement of expenses to, Indemnitee to the maximum extent permitted by law;

WHEREAS, the Bylaws (as the same may be amended, restated or otherwise modified from time to time, the “ Bylaws ”) of the Company require indemnification of the executive officers and directors of the Company, and Indemnitee may also be entitled to indemnification pursuant to the General Corporation Law of the State of Delaware (the “ DGCL ”);

WHEREAS, the Bylaws and the DGCL expressly provide that the indemnification provisions set forth therein are not exclusive, and thereby contemplate that contracts may be entered into between the Company and members of the board of directors and executive officers with respect to indemnification;

WHEREAS, the Board of Directors of the Company (the “ Board ”) has determined that the increased difficulty in attracting and retaining highly qualified persons such as Indemnitee is detrimental to the best interests of the Company’s stockholders;

WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify, and to advance expenses on behalf of, the executive officers and directors of the Company to the fullest extent permitted by applicable law, regardless of any amendment or revocation of the Certificate of Incorporation (as the same may be amended, restated or otherwise modified from time to time, the “ Charter ”) or the Bylaws, so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified; [and]

WHEREAS, this Agreement is a supplement to and in furtherance of the indemnification provided in the Bylaws and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder[.] [; and]

 

 

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Note: to amend and restate for directors with agreements in place.


[WHEREAS, Indemnitee has certain rights to indemnification and/or insurance provided by [Name of Fund/Sponsor] which Indemnitee and [Name of Fund/Sponsor] intend to be secondary to the primary obligation of the Company to indemnify Indemnitee as provided in this Agreement, with the Company’s acknowledgment and agreement to the foregoing being a material condition to Indemnitee’s willingness to serve or continue to serve on the Board.] 2

NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:

Section 1. Services to the Company . Indemnitee agrees to serve and/or continue to serve as an Indemnifiable Person in the capacity or capacities in which Indemnitee currently serves the Company as an Indemnifiable Person, and any additional capacity in which Indemnitee may agree to serve, until such time as Indemnitee’s service in a particular capacity shall end according to the terms of an agreement, the Company’s Charter or Bylaws, governing law, or otherwise. Nothing contained in this Agreement is intended to create any right to continued employment or other form of service for the Company or a Subsidiary or Enterprise of the Company by Indemnitee.

Section 2. Definitions .

As used in this Agreement:

(a) “ Change in Control ” shall mean (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a Subsidiary or a trustee or other fiduciary holding securities under an employee benefit plan of the Company or Subsidiary, who becomes the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 20% or more of the total voting power represented by the Company’s then outstanding capital stock; (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors and any new director whose election by the Board of Directors or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds ( 2 / 3 ) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the outstanding capital stock of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into capital stock of the surviving entity) at least 80% of the total voting power represented by the capital stock of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of transactions) of all or substantially all of the Company’s assets.

 

 

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Note: bracketed provisions to be included for directors affiliated with funds.

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(b) “ Enterprise ” shall mean any corporation (other than the Company), partnership, joint venture, trust, employee benefit plan, limited liability company or other legal entity of which Indemnitee is, was or will be serving at the request, election or direction of the Company as a director, manager, officer, employee, agent, trustee, member, partner, agent, attorney, consultant, member of the entity’s governing body, fiduciary or in any other similar capacity.

(c) “ Expenses ” shall mean all direct and indirect costs of any type or nature whatsoever (including, without limitation, all attorneys’ fees and related disbursements, and other out-of-pocket costs), paid or incurred by Indemnitee in connection with either the investigation, defense or appeal of, or being a witness in a Proceeding (as defined below), or establishing or enforcing a right to indemnification under this Agreement, the DGCL or otherwise; provided, however, that Expenses shall not include any judgments, fines, ERISA excise taxes or penalties or amounts paid in settlement of a Proceeding.

(d) “ Indemnifiable Event ” means any event or occurrence related to Indemnitee’s service for the Company or any Subsidiary or Enterprise as an Indemnifiable Person, or by reason of anything done or not done, or any act or omission, by Indemnitee in any such capacity.

(e) “ Indemnifiable Person ” means any person who is or was a director, officer, employee, attorney, trustee, manager, member, partner, consultant, member of an entity’s governing body (whether constituted as a board of directors, board of managers, general partner or otherwise) or other agent or fiduciary of the Company or a Subsidiary or Enterprise of the Company.

(f) “ Independent Counsel ” means a law firm, or a partner (or, if applicable, member or shareholder) of such a law firm, that is experienced in matters of Delaware corporation law and neither presently is performing, nor in the five (5) years preceding the time in question has performed services for: (i) the Company, any Subsidiary, any Enterprise or Indemnitee; or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

(g) “ Other Liabilities ” means any and all liabilities of any type whatsoever (including, but not limited to, judgments, fines, penalties, ERISA (or other benefit plan related) excise taxes or penalties, and amounts paid in settlement and all interest, taxes, assessments and other charges paid or payable in connection with or in respect of any such judgments, fines, penalties, ERISA (or other benefit plan related) excise taxes or penalties, or amounts paid in settlement).

(h) The term “ Proceeding ” shall include any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry,

 

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administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Company or otherwise and whether civil, criminal, administrative, regulatory, investigative or any other type whatsoever, and whether formal or informal, and including any appeal thereof.

(i) “ Subsidiary ” means any corporation of which more than 50% of the outstanding voting securities is owned directly or indirectly by the Company.

Section 3. Agreement to Indemnify . In the event Indemnitee is a person who was or is a party to or witness in or is threatened to be made a party to or witness in or otherwise involved in any Proceeding by reason of an Indemnifiable Event, the Company shall indemnify Indemnitee from and against any and all Expenses and Other Liabilities incurred by Indemnitee in connection with (including in preparation for) such Proceeding to the fullest extent not prohibited by the provisions of the Charter, the Bylaws and the DGCL, as the same may be amended from time to time (but only to the extent that such amendment permits the Company to provide broader indemnification rights than the Charter, the Bylaws or the DGCL permitted prior to the adoption of such amendment).

Section 4. Partial Indemnification . If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Expenses or Other Liabilities but not entitled, however, to indemnification for the total amount of such Expenses or Other Liabilities, the Company shall nevertheless indemnify Indemnitee for such total amount except as to the portion thereof to which indemnification is prohibited by the provisions of the Charter, Bylaws or the DGCL. In any review or Proceeding to determine the extent of indemnification, the Company shall bear the burden to establish, by clear and convincing evidence, the lack of a successful resolution of a particular claim, issue or matter and which amounts sought in indemnity are allocable to claims, issues or matters which were not successfully resolved. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

Section 5. Exclusions . Notwithstanding any provision in this Agreement to the contrary, the Company shall not be obligated under this Agreement:

(a) to indemnify for amounts otherwise indemnifiable hereunder (or for which advancement is provided hereunder) if and to the extent such amounts have been paid directly to Indemnitee (or paid directly to a third party on Indemnitee’s behalf) under any insurance policy, contract, agreement or otherwise[; provided that the foregoing shall not affect the rights of Indemnitee or the Fund Indemnitors as set forth in Section 11(c)] ;

(b) to indemnify Indemnitee for an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of state statutory law or common law;

 

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(c) to indemnify for any reimbursement of, or payment to, the Company by Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by Indemnitee from the sale of securities of the Company, as required in each case pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (“ SOX ”) or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of SOX);

(d) to indemnify or advance Expenses to Indemnitee with respect to any Proceeding, or part thereof, brought voluntarily by Indemnitee (and not by way of defense) except (i) where the Board has consented to the initiation of such Proceeding or part thereof, (ii) with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement, any other statute or law, as permitted under the DGCL, or otherwise, or (iii) with respect to Proceedings brought to discharge Indemnitee’s fiduciary responsibilities, whether under ERISA or otherwise, but such indemnification or advancement of Expenses may be provided by the Company in specific cases if the Board finds it to be appropriate; provided , however , that nothing in this Section 7(d) shall prevent Indemnitee from asserting counterclaims or affirmative defenses in an action brought against Indemnitee; or

(e) to indemnify Indemnitee for Other Liabilities if such indemnification is prohibited by applicable law (as such law exists at the time indemnification would otherwise be required pursuant to this Agreement).

Section 6. Advancement of Expenses . The Company shall advance all Expenses actually and reasonably incurred by Indemnitee in connection with (including in preparation for) any Proceeding related to an Indemnifiable Event, and such advancement shall be made within thirty (30) days after the receipt by the Company of a statement or statements requesting such advances (which shall include invoices received by Indemnitee in connection with such Expenses but, in the case of invoices in connection with legal services, any references to legal work performed or to expenditures made that would cause Indemnitee to waive any privilege accorded by applicable law shall not be included with the invoice) from time to time, whether prior to or after final disposition of any Proceeding. Advances shall be unsecured and interest free. Advances shall be made without regard to Indemnitee’s ability to repay the expenses and without regard to Indemnitee’s ultimate entitlement to indemnification under the other provisions of this Agreement. Indemnitee hereby undertakes to repay such amounts advanced if, and only if and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company under the provisions of this Agreement, the Charter, the Bylaws or the DGCL. The right to advances under this paragraph shall in all events continue until final disposition of any Proceeding, including any appeal therein.

Section 7. Procedure for Notification and Defense of Claim .

(a) Promptly following the time that Indemnitee has notice of the commencement of or the threat of commencement of any Proceeding, Indemnitee shall, if Indemnitee believes that indemnification or advancement of Expenses with respect thereto may be sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof, and shall provide the Company with all documentation

 

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related thereto as reasonably requested by the Company. The failure of Indemnitee to so notify the Company shall not relieve the Company of any obligation which it may have to Indemnitee under this Agreement or otherwise except to the extent that the Company is materially prejudiced in its defense of such Proceeding as a result of such failure.

(b) In the event that the Company shall be obligated hereunder to provide indemnification for or make any advancement of Expenses with respect to any Proceeding, the Company shall be entitled to assume the defense of such Proceeding, with counsel approved by Indemnitee (which approval shall not be unreasonably withheld or delayed) upon the delivery to Indemnitee of written notice of the Company’s election to do so. Such defense by the Company may include the representation of two or more parties by one attorney or law firm as permitted under the ethical rules and legal requirements related to joint representations. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees or expenses of separate counsel subsequently employed by or on behalf of Indemnitee with respect to the same Proceeding; provided that (i) Indemnitee shall have the right to employ separate counsel in any such Proceeding at Indemnitee’s expense and (ii) if (A) the employment of separate counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of such defense, or (C) the Company shall not continue to retain such counsel to defend such Proceeding, then the reasonable fees and expenses actually and reasonably incurred by Indemnitee with respect to his or her separate counsel shall be Expenses hereunder.

(c) In the event that the Company does not assume the defense in a Proceeding pursuant to paragraph (b) above, then the Company will be entitled to participate in the Proceeding at its own expense.

(d) The Company shall not be liable to indemnify Indemnitee under this Agreement or otherwise for any amounts paid in settlement of any Proceeding effected without its prior written consent (which consent shall not be unreasonably withheld or delayed); provided, however, that if a Change in Control has occurred, the Company shall be liable for indemnification of Indemnitee for amounts paid in settlement if the Independent Counsel has approved the settlement. Neither the Company nor any Subsidiary or Enterprise of the Company shall, without the prior written consent of Indemnitee (which consent shall not be unreasonably withheld or delayed), enter into a settlement of any Proceeding that might result in the imposition of any Expense, Other Liability, penalty, limitation or detriment on Indemnitee, whether indemnifiable under this Agreement or otherwise, including an admission of fault of Indemnitee, any non-monetary remedy imposed on Indemnitee or any monetary damages for which Indemnitee is not wholly and actually indemnified hereunder or, with respect to any Proceeding with respect to which Indemnitee may be or is made a party or may be otherwise entitled to seek indemnification hereunder, does not include the full release of Indemnitee from all liability in respect of such Proceeding.

 

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Section 8. Procedure Upon Application for Indemnification .

(a) To the extent that Indemnitee shall have been successful on the merits in any Proceeding to which it is a party or a participant or in defense of any claim, issue or matter therein, the Company shall indemnify Indemnitee against Expenses, and no determination shall be required to be made with respect to Indemnitee’s entitlement to indemnification hereunder. The Company also shall indemnify Indemnitee if he or she has not failed to meet the applicable standard of conduct for indemnification. In cases where the first sentence of this Section 8(a) is inapplicable, a determination with respect to Indemnitee’s entitlement to indemnification hereunder shall be made in the specific case by one of the following methods which shall be at the election of Indemnitee, in his sole discretion: (i) by a majority vote of the disinterested directors, even though less than a quorum; (ii) by a committee of disinterested directors designated by a majority vote of the disinterested directors, even though less than a quorum; or (iii) by Independent Counsel selected by Indemnitee and approved by the Board of Directors (which approval may not be unreasonably withheld or delayed) in a written opinion to the Board. If Indemnitee is an officer or director of the Company at the time that Indemnitee is making his or her election, then Indemnitee shall not select Independent Counsel to make the determination unless there are no disinterested directors or unless the disinterested directors agree to the selection of Independent Counsel. The selected forum shall be referred to herein as the “ Reviewing Party .” Notwithstanding the foregoing, following any Change in Control, the Reviewing Party shall be Independent Counsel selected in the manner provided above in this Section 8(a). For purposes hereof, disinterested directors are those members of the Board who are not parties to the Proceeding in respect of which indemnification is sought. In the case that the Reviewing Party is the Independent Counsel, a copy of Independent Counsel’s written opinion shall be delivered to Indemnitee and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within thirty (30) days after such determination to the extent any such amounts have not been previously advanced by the Company. As soon as practicable, and in no event later than thirty (30) days after receipt by the Company of written notice of Indemnitee’s choice of forum pursuant to this Section 8(a), the Company and Indemnitee shall each submit to the Reviewing Party such information as they believe is appropriate for the Reviewing Party to consider. The Reviewing Party shall arrive at its decision within a reasonable period of time following the receipt of all such information from the Company and Indemnitee, but in no event later than thirty (30) days following the receipt of all such information, provided that the time by which the Reviewing Party must reach a decision may be extended by mutual agreement of the Company and Indemnitee. Any out-of-pocket costs or expenses (including reasonable attorneys’ fees and disbursements) actually and reasonably incurred by Indemnitee in so cooperating with the Independent Counsel shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. Further, the Company agrees to pay the reasonable fees and expenses of the Independent Counsel.

(b) The Company shall indemnify Indemnitee against all Expenses incurred by Indemnitee in connection with any hearing or Proceeding under this Section 8 involving Indemnitee, and against all Expenses incurred by Indemnitee in connection with any other Proceeding between the Company and Indemnitee involving the interpretation or enforcement of the rights of Indemnitee under this Agreement unless a court of competent jurisdiction finds that

 

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each of the material claims of Indemnitee in any such Proceeding was frivolous or made in bad faith .

Section 9. Presumptions and Effect of Certain Proceedings .

(a) To the extent permitted by applicable law, in making a determination with respect to entitlement to indemnification hereunder, it shall be presumed that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 9(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making of any determination contrary to that presumption. Neither (i) the failure of the Company or of Independent Counsel to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor (ii) an actual determination by the Company or by Independent Counsel that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.

(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of guilty, nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his or her conduct was unlawful.

(c) The knowledge and/or actions, or failure to act, of any director, manager, officer, employee, agent or trustee of the Company, any subsidiary of the Company, or any Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.

(d) Indemnitee shall be deemed to have acted in good faith if Indemnitee’s action is based on the records or books of account of the Company, including financial statements, or on information supplied to Indemnitee by the officers of the Company in the course of their duties, or on the advice of legal counsel for the Company or on information or records given or reports made to the Company by an independent certified public accountant or by an appraiser or other expert selected by the Company. Whether or not the foregoing provisions of this Section 9(d) are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.

(e) The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any Proceeding to which Indemnitee is a party is

 

8


resolved in any manner other than by adverse judgment against Indemnitee (including, without limitation, settlement of such Proceeding with or without payment of money or other consideration), it shall be presumed that Indemnitee has been successful on the merits or otherwise in such Proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.

Section 10. Remedies of Indemnitee .

(a) Notwithstanding a final determination by any Reviewing Party that Indemnitee is not entitled to indemnification with respect to a specific Proceeding, Indemnitee shall be entitled to an adjudication by the Delaware Court of his or her entitlement to such indemnification, as further described in Section 10(b). Indemnitee shall have the right to apply to the Delaware Court for the purpose of enforcing Indemnitee’s right to indemnification pursuant to this Agreement. Further, the parties recognize that if any provision of this Agreement is violated by the Company, including with respect to compliance with the time periods specified herein, Indemnitee may be without an adequate remedy at law. Accordingly, in the event of any such violation, Indemnitee shall be entitled, if Indemnitee so elects, to institute Proceedings, either in law or at equity, to obtain damages, to enforce specific performance, to enjoin such violation, or to obtain any relief or any combination of the foregoing as Indemnitee may elect to pursue.

(b) In the event that a final determination by any Reviewing Party that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 10 shall be conducted in all respects as a de novo trial on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding commenced pursuant to this Section 10, the Company shall have the burden of proving Indemnitee is not entitled to indemnification or advancement, as the case may be.

(c) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 10 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement.

(d) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding, including any appeal therein.

Section 11. Non-exclusivity; Insurance; [Primacy of Indemnification;] Subrogation.

(a) The rights of indemnification and to receive advancement as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Charter, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. To the extent that a change in Delaware law, whether by statute or judicial decision, permits greater indemnification or advancement than would be afforded currently under the Charter, Bylaws and this Agreement, it is the intent of the

 

9


parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

(b) So long as Indemnitee shall continue to serve the Company or a Subsidiary or Enterprise of the Company as an Indemnifiable Person and thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed Proceeding as a result of an Indemnifiable Event, the Company shall use reasonable efforts to maintain in full force and effect for the benefit of Indemnitee as an insured an insurance policy or policies providing liability insurance for directors, managers, officers, employees, agents or trustees of the Company or of any Subsidiary or Enterprise issued by one or more reputable insurers and having the policy amount and deductible deemed appropriate by the Board. If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all reasonable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies. The purchase, establishment and maintenance of any such insurance or other arrangements shall not in any way limit or affect the rights and obligations of the Company or of Indemnitee under this Agreement except as expressly provided herein, and the execution and delivery of this Agreement by the Company and Indemnitee shall not in any way limit or affect the rights and obligations of the Company or the other party or parties thereto under any such insurance or other arrangement.

(c) [The Company hereby acknowledges that Indemnitee has certain rights to indemnification, advancement of expenses and/or insurance provided by [Name of Fund/Sponsor] and certain of its affiliates (collectively, the “ Fund Indemnitors ”). The Company hereby agrees (i) that it is the indemnitor of first resort ( i.e. , its obligations to Indemnitee are primary and any obligation of the Fund Indemnitors to advance expenses or to provide indemnification for the same expenses or liabilities incurred by Indemnitee are secondary), (ii) that it shall be required to advance the full amount of expenses incurred by Indemnitee and shall be liable for the full amount of all Expenses and Other Liabilities to the extent legally permitted and as required by the terms of this Agreement and the Charter and/or Bylaws (or any other agreement between the Company and Indemnitee), without regard to any rights Indemnitee may have against the Fund Indemnitors, and (iii) that it irrevocably waives, relinquishes and releases the Fund Indemnitors from any and all claims against the Fund Indemnitors for contribution, subrogation or any other recovery of any kind in respect thereof. The Company further agrees that no advancement or payment by the Fund Indemnitors on behalf of Indemnitee with respect to any claim for which Indemnitee has sought indemnification from the Company shall affect the foregoing and the Fund Indemnitors shall have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of the rights of recovery of Indemnitee against the

 

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Company. The Company and Indemnitee agree that the Fund Indemnitors are express third party beneficiaries of the terms of this Section 11(c).]

(d) [Except as provided in paragraph (c) above,] [I/i]n the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee [(other than against the Fund Indemnitors)], who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

(e) [Except as provided in paragraph (c) above,] [T/t]he Company’s obligation to provide indemnification or advancement hereunder to Indemnitee who is or was serving at the request of the Company as a director, manager, officer, employee, agent or trustee of any other Enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement from such other Enterprise.

Section 12. Survival of Rights; Successors and Assigns . The rights conferred on Indemnitee by this Agreement shall continue after Indemnitee has ceased to serve the Company or a Subsidiary or Enterprise as an Indemnifiable Person and shall inure to the benefit of Indemnitee and his or her heirs, executors and administrators. This Agreement shall be binding upon the Company and its successors and assigns . The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.

Section 13. Severability . If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

Section 14. Enforcement .

(a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve or continue to serve as a director or officer of the Company, and the Company

 

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acknowledges that Indemnitee is relying upon this Agreement in serving as a director or officer of the Company.

(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof; provided , however , that this Agreement is a supplement to and in furtherance of the Charter, the Bylaws and applicable law, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.

(c) The Company shall not seek from a court, or agree to, a “bar order” which would have the effect of prohibiting or limiting the Indemnitee’s rights to receive advancement of expenses under this Agreement.

Section 15. Modification and Waiver . No supplement, modification or amendment, or waiver of any provision, of this Agreement shall be binding unless executed in writing by the parties thereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions of this Agreement nor shall any waiver constitute a continuing waiver. No supplement, modification or amendment of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee prior to such supplement, modification or amendment.

Section 16. Notices . All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, (b) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed, (c) mailed by reputable overnight courier and receipted for by the party to whom said notice or other communication shall have been directed or (d) sent by facsimile transmission, with receipt of oral confirmation that such transmission has been received:

(a) If to Indemnitee, at such address as Indemnitee shall provide to the Company.

(b) If to the Company to:

      Imperva, Inc.

      3400 Bridge Parkway, Suite 200

      Redwood Shores, CA 94065

      Attention: Chief Executive Officer

 

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      With a copy to:

      Imperva, Inc.

      3400 Bridge Parkway, Suite 200

      Redwood Shores, CA 94065

      Attention: General Counsel

or to any other address as may have been furnished to Indemnitee by the Company.

Section 17. Contribution . To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any Proceeding in such proportion as is deemed fair and reasonable in light of all of the circumstances in order to reflect (i) the relative benefits received by the Company and Indemnitee in connection with the event(s) and/or transaction(s) giving rise to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transactions.

Section 18. Internal Revenue Code Section 409A . The Company intends for this Agreement to comply with the Indemnification exception under Section 1.409A-1(b)(10) of the regulations promulgated under the Internal Revenue Code of 1986, as amended (the “ Code ”), which provides that indemnification of, or the purchase of an insurance policy providing for payments of, all or part of the expenses incurred or damages paid or payable by the Indemnitee with respect to a bona fide claim against the Indemnitee or the Company do not provide for a deferral of compensation, subject to Section 409A of the Code, where such claim is based on actions or failures to act by the Indemnitee in his capacity as a service provider of the Company. The parties intend that this Agreement be interpreted and construed with such intent.

Section 19. Applicable Law and Consent to Jurisdiction . This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. The Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Delaware Court, and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) consent to service of process at the address set forth in Section 16 of this Agreement with the same legal force and validity as if served upon such party personally within the State of Delaware, (iv) waive any objection to the laying of venue of any such action or proceeding in the Delaware Court, and (v) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.

Section 20. Headings . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

 

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Section 21. Identical Counterparts . This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.

[Remainder of Page Intentionally Left Blank]

 

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IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first above written.

 

IMPERVA, INC.
By:    
  Name:
  Title:
   
  [Name of Indemnitee]

[S IGNATURE P AGE TO I NDEMNIFICATION A GREEMENT ]

Exhibit 10.6

 

LOGO   3400 Bridge Parkway,
  Redwood Shores, CA 94065
  Tel: +1 (650) 345-9000
  Fax: +1 (650) 240-0500
  www.imperva.com

September 29, 2010

 

Terry Schmid

 

 

Dear Terry:

Imperva, Inc. (the “Company”) is pleased to offer you employment on the following terms:

1. Position . Your title will be Chief Financial Officer (CFO) and you will report to the Company’s CEO, Shlomo Kramer. This is a full-time position. By signing this letter agreement, you confirm to the Company that you have no contractual commitments or other legal obligations that would prohibit you from performing your duties for the Company.

2. Cash Compensation . The Company will pay you a starting salary at the rate of $250,000 per year , payable in accordance with the Company’s standard payroll schedule. This salary will be subject to adjustment pursuant to the Company’s employee compensation policies in effect from time to time. You will be eligible to be considered for an incentive bonus. The bonus will be awarded based on quarterly objective or subjective criteria approved by the Company’s Chief Executive Officer. Your target annual bonus will be equal to $62,500 and paid on a quarterly basis.

3. Employee Benefits . As a regular employee of the Company, you will be eligible to participate in a number of Company-sponsored benefits. In addition, you will be entitled to paid vacation in accordance with the Company’s vacation policy, as in effect from time to time.

4. Stock Options . Subject to the approval of the Company’s Board of Directors, you will be granted an option to purchase 420,000 shares of the Company’s Common Stock. The exercise price per share will be equal to the fair market value per share on the date the option is granted or on your first day of employment, whichever is later. The option will be subject to the terms and conditions applicable to options granted under the Company’s 2003 Stock Plan (the “Plan”), as described in the Plan and the applicable Stock Option Agreement. The option may be exercised with respect to 25% of the Shares subject to this option when the Optionee completes 12 months of continuous service after the Vesting Commencement date. This option may be exercised with respect to an additional 6.25% of the Shares subject to this option when the Optionee completes each 3-month period of continuous service thereafter. If the Company is subject to a Change in Control before your service with the Company terminates, then the option may immediately be exercised with respect to 50% of the remaining unvested shares.

If the Company is subject to a Change in Control and you are subject to an Involuntary Termination (as defined in Section 10) within three (3) months before or twelve (12) months after that Change in Control, then the option may be exercised with respect to all shares.

 

 

1    |     Confidential Offer Letter - Terry Schmid, September 28, 2010


LOGO   3400 Bridge Parkway,
  Redwood Shores, CA 94065
  Tel: +1 (650) 345-9000
  Fax: +1 (650) 240-0500
  www.imperva.com

5. Proprietary Information and Inventions Agreement . Like all Company employees, you will be required, as a condition of your employment with the Company, to sign the Company’s standard Proprietary Information and Inventions Agreement, a copy of which is attached hereto as Exhibit A .

6. Employment Relationship . Employment with the Company is for no specific period of time. Your employment with the Company will be “at will,” meaning that either you or the Company may terminate your employment at any time and for any reason, with or without cause. Any contrary representations that may have been made to you are superseded by this letter agreement. This is the full and complete agreement between you and the Company on this term. Although your job duties, title, compensation and benefits, as well as the Company’s personnel policies and procedures, may change from time to time, the “at will” nature of your employment may only be changed in an express written agreement signed by you and a duly authorized officer of the Company (other than you).

7. Outside Activities . While you render services to the Company, you agree that you will not engage in any other employment, consulting or other business activity without the prior written consent of the Company. While you render services to the Company, you also will not assist any person or entity in competing with the Company, in preparing to compete with the Company or in hiring any employees or consultants of the Company.

8. Withholding Taxes . All forms of compensation referred to in this letter agreement are subject to reduction to reflect applicable withholding and payroll taxes and other deductions required by law.

9. Entire Agreement . This letter agreement supersedes and replaces any prior agreements, representations or understandings, whether written, oral or implied, between you and the Company.

 

10. Definitions . The following terms have the meaning set forth below wherever they are used in this letter agreement:

Involuntary Termination ” means either (a) involuntary discharge by the Company for reasons other than Cause, as defined below, or (b) voluntary resignation following (i) a change in your position with the Company that materially reduces your level of authority or responsibility, (ii) a reduction in your base salary by more than 10% or (iii) receipt of notice that your principal workplace will be relocated more than 30 miles.

Cause ” means (a) your unauthorized use or disclosure of the Company’s confidential information or trade secrets, which use or disclosure causes material harm to the Company, (b) your material breach of any agreement between you and the Company, which breach causes material harm to the Company, (c) your material failure to comply with the Company’s written policies or rules, which failure causes material harm to the Company (d) your conviction of, or

 

 

2    |     Confidential Offer Letter - Terry Schmid, September 28, 2010


LOGO   3400 Bridge Parkway,
  Redwood Shores, CA 94065
  Tel: +1 (650) 345-9000
  Fax: +1 (650) 240-0500
  www.imperva.com

your plea of “guilty” or “no contest” to, a felony under the laws of the United States or any State involving fraud, dishonesty, or moral turpitude, (e) your gross negligence or willful misconduct, (f) your continuing failure to perform assigned duties after receiving written notification of the failure from the Company’s Board of Directors or (g) your failure to cooperate in good faith with a governmental or internal investigation of the Company or its directors, officers or employees, if the Company has requested your cooperation. In the cases of (b) or (f) above, “Cause” will only exist if you have not cured the events described in (b) or (f) giving rise to “Cause” within twenty (20) days of written notice being provided to you.

* * * * *

 

 

3    |     Confidential Offer Letter - Terry Schmid, September 28, 2010


LOGO   3400 Bridge Parkway,
  Redwood Shores, CA 94065
  Tel: +1 (650) 345-9000
  Fax: +1 (650) 240-0500
  www.imperva.com

We hope that you will accept our offer to join the Company. You may indicate your agreement with these terms and accept this offer by signing and dating both the enclosed duplicate original of this letter agreement and the enclosed Proprietary Information and Inventions Agreement and returning them to me. This offer, if not accepted, will expire at the close of business on October 8, 2010 . As required by law, your employment with the Company is contingent upon your providing legal proof of your identity and authorization to work in the United States, as well as passing the Company’s mandatory background verification. Your employment is also contingent upon your starting work with the Company on or before November 1, 2010 .

 

Very truly yours,
I PMERVA , I NC .
By:  

/s/ Shlomo Kramer

Shlomo Kramer
Title:   CEO
Dated:  

 

I have read and accept this employment offer:

 

/s/ Terry Schmid

  Signature of Terry Schmid
Dated:   September 30, 2010

 

 

4    |     Confidential Offer Letter - Terry Schmid, September 28, 2010


LOGO   3400 Bridge Parkway,
  Redwood Shores, CA 94065
  Tel: +1 (650) 345-9000
  Fax: +1 (650) 240-0500
  www.imperva.com

Attachment : Exhibit A: Proprietary Information and Inventions Agreement

PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT

The following confirms and memorializes an agreement that Imperva Inc., a Delaware corporation (the “Company”) and I, Terry Schmid, have had since the commencement of my employment with the Company in any capacity and that is and has been a material part of the consideration for my employment by Company:

1. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict with this Agreement or my employment with Company. I will not violate any agreement with or rights of any third party or, except as expressly authorized by Company in writing hereafter, use or disclose my own or any third party’s confidential information or intellectual property when acting within the scope of my employment or otherwise on behalf of Company. Further, I have not retained anything containing any confidential information of a prior employer or other third party, whether or not created by me.

2. Company shall own all right, title and interest (including patent rights, copyrights, trade secret rights, mask work rights, sui generis database rights and all other intellectual and industrial property rights of any sort throughout the world) relating to any and all inventions (whether or not patentable), works of authorship, mask works, designs, knowhow, ideas and information made or conceived or reduced to practice, in whole or in part, by me during the term of my employment with Company to and only to the fullest extent allowed by applicable law (collectively “Inventions”) and I will promptly disclose all Inventions to Company. I will also disclose anything I believe is excluded by law so that the Company can make an independent assessment. I hereby make all assignments necessary to accomplish the foregoing. I shall further assist Company, at Company’s expense, to further evidence, record and perfect such assignments, and to perfect, obtain, maintain, enforce, and defend any rights specified to be so owned or assigned. I hereby irrevocably designate and appoint Company as its agents and attorneys-in-fact to act for and in my behalf to execute and file any document and to do all other lawfully permitted acts to further the purposes of the foregoing with the same legal force and effect as if executed by me. If I wish to clarify that something created by me prior to my employment that relates to Company’s actual or proposed business is not within the scope of this Agreement, I have listed it on Appendix A. If I use or disclose my own or any third party’s confidential information or intellectual property when acting within the scope of my employment or otherwise on behalf of Company, Company will have and I hereby grant Company a perpetual, irrevocable, worldwide royalty-free, non-exclusive, sublicensable right and license to exploit and exercise all such confidential information and intellectual property rights.

3. To the extent allowed by law, paragraph 2 includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as “moral rights,” “artist’s rights,” “droit moral,” or the like (collectively “Moral Rights”). To the extent I retain any such Moral Rights under applicable law, I hereby ratify and consent to any action that may be taken with respect to such Moral Rights by or authorized by Company and agree not to assert any Moral Rights with respect thereto. I will confirm any such ratifications, consents and agreements from time to time as requested by Company.

 

 

5    |     Confidential Offer Letter - Terry Schmid, September 28, 2010


LOGO   3400 Bridge Parkway,
  Redwood Shores, CA 94065
  Tel: +1 (650) 345-9000
  Fax: +1 (650) 240-0500
  www.imperva.com

4. I agree that all Inventions and all other business, technical and financial information (including, without limitation, the identity of and information relating to customers or employees) I develop, learn or obtain during the term of my employment that relate to Company or the business or demonstrably anticipated business of Company or that are received by or for Company in confidence, constitute “Proprietary Information.” I will hold in confidence and not disclose or, except within the scope of my employment, use any Proprietary Information. However, I shall not be obligated under this paragraph with respect to information I can document is or becomes readily publicly available without restriction through no fault of mine. Upon termination of my employment, I will promptly return to Company all items containing or embodying Proprietary Information (including all copies), except that I may keep my personal copies of (i) my compensation records, (ii) materials distributed to shareholders generally and (iii) this Agreement. I also recognize and agree that I have no expectation of privacy with respect to Company’s telecommunications, networking or information processing systems (including, without limitation, stored computer files, email messages and voice messages) and that my activity and any files or messages on or using any of those systems may be monitored at any time without notice.

5. Until one year after the term of my employment, I will not encourage or solicit any employee or consultant of Company to leave Company for any reason (except for the bona fide firing of Company personnel within the scope of my employment).

6. I agree that during the term of my employment with Company (whether or not during business hours), I will not engage in any activity that is in any way competitive with the business or demonstrably anticipated business of Company, and I will not assist any other person or organization in competing or in preparing to compete with any business or demonstrably anticipated business of Company.

7. I agree that this Agreement is not an employment contract for any particular term and that I have the right to resign and Company has the right to terminate my employment at will, at any time, for any or no reason, with or without cause. In addition, this Agreement does not purport to set forth all of the terms and conditions of my employment, and, as an employee of Company, I have obligations to Company which are not set forth in this Agreement. However, the terms of this Agreement govern over any inconsistent terms and can only be changed by a subsequent written agreement signed by the President of Company.

8. I agree that my obligations under paragraphs 2, 3, 4 and 5 of this Agreement shall continue in effect after termination of my employment, regardless of the reason or reasons for termination, and whether such termination is voluntary or involuntary on my part, and that Company is entitled to communicate my obligations under this Agreement to any future employer or potential employer of mine. My obligations under paragraphs 2, 3 and 4 also shall be binding upon my heirs, executors, assigns, and administrators and shall inure to the benefit of Company, it subsidiaries, successors and assigns.

 

 

6    |     Confidential Offer Letter - Terry Schmid, September 28, 2010


LOGO   3400 Bridge Parkway,
  Redwood Shores, CA 94065
  Tel: +1 (650) 345-9000
  Fax: +1 (650) 240-0500
  www.imperva.com

9. Any dispute in the meaning, effect or validity of this Agreement shall be resolved in accordance with the laws of the State of California without regard to the conflict of laws provisions thereof. I further agree that if one or more provisions of this Agreement are held to be illegal or unenforceable under applicable California law, such illegal or unenforceable portion(s) shall be limited or excluded from this Agreement to the minimum extent required so that this Agreement shall otherwise remain in frill force and effect and enforceable in accordance with its terms. I also understand that any breach of this Agreement will cause irreparable harm to Company for which damages would not be a adequate remedy, and, therefore, Company will be entitled to injunctive relief with respect thereto in addition to any other remedies.

I HAVE READ THIS AGREEMENT CAREFULLY AND I UNDERSTAND AND ACCEPT THE OBLIGATIONS WHICH IT IMPOSES UPON ME WITHOUT RESERVATION. NO PROMISES OR REPRESENTATIONS HAVE BEEN MADE TO ME TO INDUCE ME TO SIGN THIS AGREEMENT. I SIGN THIS AGREEMENT VOLUNTARILY AND FREELY, IN DUPLICATE, WITH THE UNDERSTANDING THAT ONE COUNTERPART WILL BE RETAINED BY COMPANY AND THE OTHER COUNTERPART WILL BE RETAINED BY ME.

 

September 30 , 2010

/s/ Terry Schmid

Employee Signature

Terry Schmid

Name (Printed)

 

Accepted and Agreed to:
Imperva Inc.
By  

/s/ Douglas Burns

 

 

7    |     Confidential Offer Letter - Terry Schmid, September 28, 2010


LOGO   3400 Bridge Parkway,
  Redwood Shores, CA 94065
  Tel: +1 (650) 345-9000
  Fax: +1 (650) 240-0500
  www.imperva.com

APPENDIX A

California Labor Code Section 2870. Application of provision providing that employee shall assign or offer to assign rights in invention to employer. Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either:

A. Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or

B. Result from any work performed by the employee for his employer. To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.

 

 

8    |     Confidential Offer Letter - Terry Schmid, September 28, 2010

EXHIBIT 10.19

IMPERVA, INC.

2011 Employee Stock Purchase Plan

1. Establishment of Plan. Imperva, Inc. (the “ Company ”) proposes to grant options for purchase of the Company’s Common Stock to eligible employees of the Company and its Participating Corporations (as hereinafter defined) pursuant to this Employee Stock Purchase Plan (this “ Plan ”). For purposes of this Plan, “Parent” and “Subsidiary” shall have the same meanings as “parent corporation” and “subsidiary corporation” in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the “ Code ”), and “Corporate Group” shall refer collectively to the Company and all its Parents and Subsidiaries. “Participating Corporations” are the Company and any current or future Parents or Subsidiaries that the Board of Directors of the Company (the “ Board ”) designates from time to time as corporations that shall participate in this Plan. The Company intends this Plan to qualify as an “employee stock purchase plan” under Section 423 of the Code (including any amendments to or replacements of such Section), and this Plan shall be so construed. Any term not expressly defined in this Plan but defined for purposes of Section 423 of the Code shall have the same definition therein. A total of 500,000 shares of the Company’s Common Stock is reserved for issuance under this Plan. In addition, on January 1 of each for the first eight calendar years after the first Offering Date, the aggregate number of shares of the Company’s Common Stock reserved for issuance under the Plan shall be increased automatically by the number of shares equal to one percent (1%) of the total number of outstanding shares of the Company Common Stock on the immediately preceding December 31 (rounded down to the nearest whole share); provided , that the Board or the Committee may in its sole discretion reduce the amount of the increase in any particular year; and, provided , further , that the aggregate number of shares issued over the term of this Plan shall not exceed 20,000,000 shares of Common Stock. The number of shares reserved for issuance under this Plan and the maximum number of shares that may be issued under this Plan shall be subject to adjustments effected in accordance with Section 14 of this Plan.

2. Purpose . The purpose of this Plan is to provide eligible employees of the Company and Participating Corporations with a means of acquiring an equity interest in the Company through payroll deductions, to enhance such employees’ sense of participation in the affairs of the Company and Participating Corporations, and to provide an incentive for continued employment.

3. Administration . This Plan shall be administered by the Compensation Committee of the Board or by the Board (either referred to herein as the “ Committee ”). Subject to the provisions of this Plan and the limitations of Section 423 of the Code or any successor provision in the Code, all questions of interpretation or application of this Plan shall be determined by the Committee and its decisions shall be final and binding upon all Participants. The Committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, and to determine eligibility and decide upon any and all claims filed under the Plan. Every finding, decision and determination made by the Committee will, to the fullest extent permitted by law, be final and binding upon all parties. Notwithstanding any provision to the contrary in this Plan, the Committee may adopt rules and/or procedures relating to the operation and administration of the Plan to accommodate requirements of local law and procedures outside of the United States. Members of the Committee shall receive no compensation for their services in connection with the administration of this Plan, other than standard fees as established from time to time by the Board for services rendered by Board members serving on Board committees. All expenses incurred in connection with the administration of this Plan shall be paid by the Company.


4. Eligibility . Any employee of the Company or the Participating Corporations is eligible to participate in an Offering Period (as hereinafter defined) under this Plan except the following:

(a) employees who are customarily employed for twenty (20) hours or less per week;

(b) employees who are customarily employed for five (5) months or less in a calendar year;

(c) employees who, together with any other person whose stock would be attributed to such employee pursuant to Section 424(d) of the Code, own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Corporations or who, as a result of being granted an option under this Plan with respect to such Offering Period, would own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Corporations;

(d) employees who do not meet any other eligibility requirements that the Committee may choose to impose (within the limits permitted by the Code); and

(e) individuals who provide services to the Company or any of its Participating Corporations as independent contractors who are reclassified as common law employees for any reason except for federal income and employment tax purposes.

5. Offering Dates .

(a) The offering periods of this Plan (each, an “ Offering Period ”) may be of up to twenty-four (24) months duration and shall commence and end at the times designated by the Committee. Each Offering Period may consist of up to five (5) purchase periods (individually, a “ Purchase Period ”) during which payroll deductions of Participants are accumulated under this Plan.

(b) The initial Offering Period shall commence on the date specified by the Committee, provided that such date must follow the date on which the Registration Statement covering the initial public offering of shares of the Company’s Common Stock (the “ IPO ”) is declared effective by the U.S. Securities and Exchange Commission (the “ Effective Date ”), and shall end with the earlier of the next succeeding May 15 or November 15 that first occurs no sooner than the later of (i) six months after the Effective Date and (ii) in the event that the underwriters for the IPO extend the lock-up period in connection with the IPO beyond 180 days, the business day following the final day of such extended lock-up period. The initial Offering Period shall consist of a single Purchase Period. Thereafter, a six month Offering Period shall commence on each May 16 and November 16, with each such Offering Period also consisting of a single six-month Purchase Period.

(c) The first business day of each Offering Period is referred to as the “ Offering Date ”; however, for the initial Offering Period this shall be the Effective Date. The last business day of each Purchase Period is referred to as the “ Purchase Date .” The Committee shall have the power to change these terms as provided in Section 25 below.

6. Participation in this Plan .

(a) Any employee who is an eligible employee determined in accordance with Section 4 immediately prior to the initial Offering Period will be automatically enrolled in the initial Offering Period under this Plan. With respect to subsequent Offering Periods, any eligible employee determined in accordance with Section 4 will be eligible to participate in this Plan, subject to the requirement of Section 6(b) hereof and the other terms and provisions of this Plan. Eligible employees who meet the eligibility requirements set forth in Section 4 and who are either automatically enrolled in the initial Offering Period or who elect to participate in this Plan pursuant to Section 6(b) are referred to herein as a “ Participant ” or collectively as “ Participants .”

 

2


(b) Notwithstanding the foregoing, (i) an eligible employee may elect to decrease the number of shares of Common Stock that such employee would otherwise be permitted to purchase for the initial Offering Period under the Plan through payroll deductions by delivering a subscription agreement to the Company within thirty (30) days after the filing of an effective registration statement pursuant to Form S-8 and (ii) the Committee may set a later time for filing the subscription agreement authorizing payroll deductions for all eligible employees with respect to a given Offering Period. With respect to Offering Periods after the initial Offering Period, a Participant may elect to participate in this Plan by submitting a subscription agreement prior to the commencement of the Offering Period (or such earlier date as the Committee may determine) to which such agreement relates.

(c) Once an employee becomes a Participant in an Offering Period, then such Participant will automatically participate in the Offering Period commencing immediately following the last day of such prior Offering Period unless the Participant withdraws or is deemed to withdraw from this Plan or terminates further participation in the Offering Period as set forth in Section 11 below. Such Participant is not required to file any additional subscription agreement in order to continue participation in this Plan.

7. Grant of Option on Enrollment . Becoming a Participant with respect to an Offering Period will constitute the grant (as of the Offering Date) by the Company to such Participant of an option to purchase on the Purchase Date up to that number of shares of Common Stock of the Company determined by a fraction, the numerator of which is the amount accumulated in such Participant’s payroll deduction account during such Purchase Period and the denominator of which is the lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company’s Common Stock on the Offering Date (but in no event less than the par value of a share of the Company’s Common Stock), or (ii) eighty-five percent (85%) of the fair market value of a share of the Company’s Common Stock on the Purchase Date (but in no event less than the par value of a share of the Company’s Common Stock) provided, however , that for the Purchase Period within the initial Offering Period the numerator shall be fifteen percent (15%) of the Participant’s compensation (as defined below) for such Purchase Period and provided , further , that the number of shares of the Company’s Common Stock subject to any option granted pursuant to this Plan shall not exceed the lesser of (x) the maximum number of shares set by the Committee pursuant to Section 10(b) below with respect to the applicable Purchase Date, or (y) the maximum number of shares which may be purchased pursuant to Section 10(a) below with respect to the applicable Purchase Date. The fair market value of a share of the Company’s Common Stock shall be determined as provided in Section 8 below.

8. Purchase Price . The purchase price per share at which a share of Common Stock will be sold in any Offering Period shall be eighty-five percent (85%) of the lesser of:

(a) The fair market value on the Offering Date; or

(b) The fair market value on the Purchase Date.

The term “ fair market value ” means, as of any date, the value of a share of the Company’s Common Stock determined as follows:

(i) if such Common Stock is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal or such other source as the Committee deems reliable;

(ii) if such Common Stock is publicly traded but is not admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal or such other source as the Committee deems reliable; or

(iii) if none of the foregoing is applicable, by the Committee in good faith.

 

3


9. Payment of Purchase Price; Payroll Deduction Changes; Share Issuances .

(a) The purchase price of the shares is accumulated by regular payroll deductions made during each Offering Period. The deductions are made as a percentage of the Participant’s compensation in one percent (1%) increments not less than one percent (1%), nor greater than fifteen percent (15%) or such lower limit set by the Committee. Compensation shall mean all W-2 cash compensation categorized by the Company as base salary or regular hourly wages, and expressly excluding commissions, overtime, shift premiums, bonuses, allowances and reimbursements for expenses, income attributable to the exercise of stock options and incentive compensation, plus draws against commissions, provided , however , that for purposes of determining a Participant’s compensation, any election by such Participant to reduce his or her regular cash remuneration under Sections 125 or 401(k) of the Code shall be treated as if the Participant did not make such election. Payroll deductions shall commence on the first payday following the last Purchase Date (however, with respect to the initial Offering Period the first payday that can reasonably be accommodated by the Company after both: (i) the Participant’s filing of an authorization for payroll deductions with the Company; and (ii) the effective date of filing with the U.S. Securities and Exchange Commission a securities registration statement for the Plan) and shall continue to the end of the Offering Period unless sooner altered or terminated as provided in this Plan.

(b) A Participant may decrease the rate of payroll deductions during an Offering Period by filing with the Company a new authorization for payroll deductions, with the new rate to become effective for the next payroll period commencing after the Company’s receipt of the authorization and continuing for the remainder of the Offering Period unless changed as described below. Such change in the rate of payroll deductions may be made at any time during an Offering Period, but not more than one (1) decrease may be made effective during any Purchase Period. A Participant may increase or decrease the rate of payroll deductions for any subsequent Offering Period by filing with the Company a new authorization for payroll deductions prior to the beginning of such Offering Period, or such other time period as specified by the Committee.

(c) A Participant may reduce his or her payroll deduction percentage to zero during an Offering Period by filing with the Company a request for cessation of payroll deductions. Such reduction shall be effective beginning with the next payroll period after the Company’s receipt of the request and no further payroll deductions will be made for the duration of the Offering Period. Payroll deductions credited to the Participant’s account prior to the effective date of the request shall be used to purchase shares of Common Stock of the Company in accordance with Section (e) below. A reduction of the payroll deduction percentage to zero shall be treated as such Participant’s withdrawal from such Offering Period, and the Plan, effective as of the day after the next Purchase Date following the filing date of such request with the Company.

(d) All payroll deductions made for a Participant are credited to his or her account under this Plan and are deposited with the general funds of the Company. No interest accrues on the payroll deductions. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions.

(e) On each Purchase Date, so long as this Plan remains in effect and provided that the Participant has not submitted a signed and completed withdrawal form before that date which notifies the Company that the Participant wishes to withdraw from that Offering Period under this Plan and have all payroll deductions accumulated in the account maintained on behalf of the Participant as of that date returned to the Participant, the Company shall apply the funds then in the Participant’s account to the purchase of whole shares of Common Stock reserved under the option granted to such Participant with respect to the Offering Period to the extent that such option is exercisable on the Purchase Date. The

 

4


purchase price per share shall be as specified in Section 8 of this Plan. Any amount remaining in a Participant’s account on a Purchase Date which is less than the amount necessary to purchase a full share of the Company’s Common Stock shall be carried forward, without interest, into the next Purchase Period or Offering Period, as the case may be. In the event that this Plan has been oversubscribed, all funds not used to purchase shares on the Purchase Date shall be returned to the Participant, without interest. No Common Stock shall be purchased on a Purchase Date on behalf of any employee whose participation in this Plan has terminated prior to such Purchase Date.

(f) As promptly as practicable after the Purchase Date, the Company shall issue shares for the Participant’s benefit representing the shares purchased upon exercise of his or her option.

(g) During a Participant’s lifetime, his or her option to purchase shares hereunder is exercisable only by him or her. The Participant will have no interest or voting right in shares covered by his or her option until such option has been exercised.

10. Limitations on Shares to be Purchased .

(a) No Participant shall be entitled to purchase stock under any Offering Period at a rate which, when aggregated with such Participant’s rights to purchase stock that are also outstanding in the same calendar year(s) (whether under other Offering Periods or other employee stock purchase plans of the Corporate Group), exceeds $25,000 in fair market value, determined as of the Offering Date, (or such other limit as may be imposed by the Code) for each calendar year in which such Offering Period is in effect (hereinafter the “ Maximum Share Amount ”). The Company shall automatically suspend the payroll deductions of any Participant as necessary to enforce such limit provided that when the Company automatically resumes such payroll deductions, the Company must apply the rate in effect immediately prior to such suspension.

(b) The Committee may, in its sole discretion, set a lower maximum number of shares which may be purchased by any Participant during any Offering Period than that determined under Section 10(a) above, which shall then be the Maximum Share Amount for subsequent Offering Periods provided however, in no event shall a Participant be permitted to more than 10,000 shares (the “ Maximum Share Number ”) during any one Offering Period (or such other Maximum Share Number as may be determined by the Committee prior to the commencement of an Offering Period to which such new Maximum Share Number is to apply, subject to the limit in Section 10(a) above). If a new Maximum Share Amount is set, then all Participants must be notified of such Maximum Share Amount prior to the commencement of the next Offering Period for which it is to be effective. The Maximum Share Amount shall continue to apply with respect to all succeeding Offering Periods unless revised by the Committee as set forth above.

(c) If the number of shares to be purchased on a Purchase Date by all Participants exceeds the number of shares then available for issuance under this Plan, then the Company will make a pro rata allocation of the remaining shares in as uniform a manner as shall be reasonably practicable and as the Committee shall determine to be equitable. In such event, the Company shall give written notice of such reduction of the number of shares to be purchased under a Participant’s option to each Participant affected.

(d) Any payroll deductions accumulated in a Participant’s account which are not used to purchase stock due to the limitations in this Section 10, and not covered by Section 9(e), shall be returned to the Participant as soon as practicable after the end of the applicable Purchase Period, without interest.

11. Withdrawal .

(a) Each Participant may withdraw from an Offering Period under this Plan by signing and delivering to the Company a written notice to that effect on a form provided for such purpose by the

 

5


Company. Such withdrawal may be elected at any time prior to the end of an Offering Period, or such other time period as specified by the Committee.

(b) Upon withdrawal from this Plan, the accumulated payroll deductions shall be returned to the withdrawn Participant, without interest, and his or her interest in this Plan shall terminate. In the event a Participant voluntarily elects to withdraw from this Plan, he or she may not resume his or her participation in this Plan during the same Offering Period, but he or she may participate in any Offering Period under this Plan which commences on a date subsequent to such withdrawal by filing a new authorization for payroll deductions in the same manner as set forth in Section 6 above for initial participation in this Plan.

12. Termination of Employment . Termination of a Participant’s employment for any reason, including retirement, death, disability, or the failure of a Participant to remain an eligible employee of the Company or of a Participating Corporation, immediately terminates his or her participation in this Plan. In such event, accumulated payroll deductions credited to the Participant’s account will be returned to him or her or, in the case of his or her death, to his or her legal representative, without interest. For purposes of this Section 12, an employee will not be deemed to have terminated employment or failed to remain in the continuous employ of the Company or of a Participating Corporation in the case of sick leave, military leave, or any other leave of absence approved by the Company; provided that such leave is for a period of not more than ninety (90) days or reemployment upon the expiration of such leave is guaranteed by contract or statute.

13. Return of Payroll Deductions . In the event a Participant’s interest in this Plan is terminated by withdrawal, termination of employment or otherwise, or in the event this Plan is terminated by the Board, the Company shall deliver to the Participant all accumulated payroll deductions credited to such Participant’s account. No interest shall accrue on the payroll deductions of a Participant in this Plan.

14. Capital Changes . If the number of outstanding shares of Common Stock is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company, without consideration, then the Committee shall adjust the number and class of shares that may be delivered under the Plan, the purchase price per share and the number of shares covered by each option under the Plan which has not yet been exercised, and the numerical limits of Sections 1 and 10 shall be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and in compliance with applicable securities laws; provided that fractions of a share will not be issued.

15. Nonassignability . Neither payroll deductions credited to a Participant’s account nor any rights with regard to the exercise of an option or to receive shares under this Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 22 below) by the Participant. Any such attempt at assignment, transfer, pledge or other disposition shall be void and without effect.

16. Use of Participant Funds and Reports . The Company may use all payroll deductions received or held by it under the Plan for any corporate purpose, and the Company will not be required to segregate Participant payroll deductions. Until Shares are issued, Participants will have only the rights of an unsecured creditor. On request, each Participant shall receive promptly after the end of each Purchase Period a report of his or her account setting forth the total payroll deductions accumulated, the number of shares purchased, the per share price thereof and the remaining cash balance, if any, carried forward to the next Purchase Period or Offering Period, as the case may be.

17. Notice of Disposition . Each Participant shall notify the Company in writing if the Participant disposes of any of the shares purchased in any Offering Period pursuant to this Plan if such disposition occurs within two (2) years from the Offering Date or within one (1) year from the Purchase Date on which such shares were purchased (the “ Notice Period ”). The Company may, at any time during

 

6


the Notice Period, place a legend or legends on any certificate representing shares acquired pursuant to this Plan requesting the Company’s transfer agent to notify the Company of any transfer of the shares. The obligation of the Participant to provide such notice shall continue notwithstanding the placement of any such legend on the certificates.

18. No Rights to Continued Employment . Neither this Plan nor the grant of any option hereunder shall confer any right on any employee to remain in the employ of the Company or any Participating Corporation, or restrict the right of the Company or any Participating Corporation to terminate such employee’s employment.

19. Equal Rights And Privileges . All eligible employees shall have equal rights and privileges with respect to this Plan so that this Plan qualifies as an “employee stock purchase plan” within the meaning of Section 423 or any successor provision of the Code and the related regulations. Any provision of this Plan which is inconsistent with Section 423 or any successor provision of the Code shall, without further act or amendment by the Company, the Committee or the Board, be reformed to comply with the requirements of Section 423. This Section 19 shall take precedence over all other provisions in this Plan.

20. Notices . All notices or other communications by a Participant to the Company under or in connection with this Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof.

21. Term; Stockholder Approval . This Plan will become effective on the Effective Date. This Plan shall be approved by the stockholders of the Company, in any manner permitted by applicable corporate law, within twelve (12) months before or after the date this Plan is adopted by the Board. No purchase of shares that are subject to such stockholder approval before becoming available under this Plan shall occur prior to stockholder approval of such shares and the Board or Committee may delay any Purchase Date and postpone the commencement of any Offering Period subsequent to such Purchase Date as deemed necessary or desirable to obtain such approval (provided that if a Purchase Date would occur more than twenty-four (24) months after commencement of the Offering Period to which it relates, then such Purchase Date shall not occur and instead such Offering Period shall terminate without the purchase of such shares and Participants in such Offering Period shall be refunded their contributions without interest). This Plan shall continue until the earlier to occur of (a) termination of this Plan by the Board (which termination may be effected by the Board at any time pursuant to Section 25 below), (b) issuance of all of the shares of Common Stock reserved for issuance under this Plan, or (c) the tenth anniversary of the Effective Date of the Plan.

22. Designation of Beneficiary .

(a) A Participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the Participant’s account under this Plan in the event of such Participant’s death subsequent to the end of a Purchase Period but prior to delivery to him of such shares and cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant’s account under this Plan in the event of such Participant’s death prior to a Purchase Date.

(b) Such designation of beneficiary may be changed by the Participant at any time by written notice. In the event of the death of a Participant and in the absence of a beneficiary validly designated under this Plan who is living at the time of such Participant’s death, the Company shall deliver such shares or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.

 

7


23. Conditions Upon Issuance of Shares; Limitation on Sale of Shares . Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or automated quotation system upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

24. Applicable Law . The Plan shall be governed by the substantive laws (excluding the conflict of laws rules) of the State of Delaware.

25. Amendment or Termination . The Committee, in its sole discretion, may amend, suspend, or terminate the Plan, or any part thereof, at any time and for any reason. If the Plan is terminated, the Committee, in its discretion, may elect to terminate all outstanding Offering Periods either immediately or upon completion of the purchase of shares of Common Stock on the next Purchase Date (which may be sooner than originally scheduled, if determined by the Committee in its discretion), or may elect to permit Offering Periods to expire in accordance with their terms (and subject to any adjustment pursuant to Section 14). If an Offering Period is terminated prior to its previously-scheduled expiration, all amounts then credited to Participants’ accounts for such Offering Period, which have not been used to purchase shares of the Company’s Common Stock, shall be returned to those Participants (without interest thereon, except as otherwise required under local laws) as soon as administratively practicable. Further, the Committee will be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a Participant in order to adjust for delays or mistakes in the administration of the Plan, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of the Company’s Common Stock for each Participant properly correspond with amounts withheld from the Participant’s base salary or regular hourly wages, and establish such other limitations or procedures as the Committee determines in its sole discretion advisable which are consistent with the Plan. Such actions will not require stockholder approval or the consent of any Participants. However, no amendment shall be made without approval of the stockholders of the Company (obtained in accordance with Section 21 above) within twelve (12) months of the adoption of such amendment (or earlier if required by Section 21) if such amendment would: (a) increase the number of shares that may be issued under this Plan; or (b) change the designation of the employees (or class of employees) eligible for participation in this Plan.

26. Corporate Transactions .

(a) In the event of a Corporate Transaction (as defined below), each outstanding right to purchase Company Common Stock will be assumed or an equivalent option substituted by the successor corporation or a parent or a subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the purchase right, the Offering Period with respect to which such purchase right relates will be shortened by setting a new Purchase Date (the “ New Purchase Date ”) and will end on the New Purchase Date. The New Purchase Date shall occur on or prior to the consummation of the Corporate Transaction.

(b) Corporate Transaction ” means the occurrence of any of the following events: (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) or “group” (two or more persons acting as a partnership, limited partnership, syndicate or other group for the purpose of acquiring, holding, or disposing of the applicable securities referred to herein) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then-outstanding voting securities; (ii) the consummation of the sale or other disposition by

 

8


the Company of all or substantially all of the Company’s assets; (iii) the consummation of a merger, reorganization, consolidation or similar transaction or series of related transactions of the Company with any other corporation, other than a merger, reorganization, consolidation or similar transaction (or series of related transactions) which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least a majority of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger, reorganization, consolidation or similar transaction (or series of related transactions) or (iv) any other transaction which qualifies as a “corporate transaction” under Section 424(a) of the Code wherein the stockholders of the Company give up all of their equity interest in the Company (except for the acquisition, sale or transfer of all or substantially all of the outstanding shares of the Company).

 

9

EXHIBIT 10.20

Confidential

July 14, 2011

David N. Strohm

[Address]

Dear David:

On behalf of Imperva, Inc. (the “ Company ”), I am pleased to inform you that the Company’s Board of Directors (the “ Board ”) is interested in having you serve as a member of the Board and as a member of the Board’s Audit Committee. If all necessary Board and stockholder action is taken, the Company is prepared to offer you the compensation described below in exchange for your performance of certain duties as a director.

If elected as a member of the Board, you will be offered the opportunity to purchase 100,000 of Company’s Common Stock under the Company’s Stock Option Plan (the “ Initial Shares ”), as amended from time to time (the “ Plan ”), a copy of which will be furnished to you. We expect that you will be appointed to the Board at the Board meeting to be held on August 17, 2011 and at this meeting the purchase of the Initial Shares would be approved by the Board. The Initial Shares shall vest as follows: 25% of the Initial Shares shall vest after 12 months of service on the Board and the remainder of the Initial Shares shall vest in 36 equal monthly installments as you continue service on the Board. Such vesting shall commence as of your election to the Board. The vesting of your Initial Shares shall accelerate fully upon a change of control of the Company pursuant to and in accordance with the terms of the Plan. In addition, you will be offered the opportunity to purchase an additional 50,000 shares of the Company’s Common Stock in connection with the Company’s proposed initial public offering (the “ Subsequent Shares ”). The Subsequent Shares shall not be subject to vesting. Finally, in connection with the Company’s proposed initial public offering, the Company intends to implement a compensation policy for members of the Board and you will participate in the program we implement.

For so long as you are a member of the Board, the Company will reimburse you for your reasonable out-of-pocket expenses, including reasonable travel expenses, incurred in attending Company Board meetings and committee meetings and in carrying out your duties as a director or committee member.

You understand that, if elected, you will serve on the Board at the pleasure of the stockholders of Company. You know of no reason why you would be precluded from serving as a member of the Board or any of its committees, either because of existing competition restrictions or fiduciary duty obligations or otherwise.

On behalf of the Company, we are excited about the possibility of having you join us at this critical juncture in our growth and development.

 

Sincerely,
Shlomo Kramer,
Chief Executive Officer

Acknowledged and agreed to on

this 14th day of July, 2011

 

/s/ David N. Strohm
David N. Strohm

EXHIBIT 10.21

Confidential

July 20, 2011

Frank Slootman

[Address]

Dear Frank:

On behalf of Imperva, Inc. (the “ Company ”), I am pleased to inform you that the Company’s Board of Directors (the “ Board ”) is interested in having you serve as a member of the Board and as a member of the Board’s Compensation Committee. If all necessary Board and stockholder action is taken, the Company is prepared to offer you the compensation described below in exchange for your performance of certain duties as a director.

If elected as a member of the Board, you will be offered the opportunity to purchase 80,000 of Company’s Common Stock under the Company’s Stock Option Plan (the “ Initial Shares ”), as amended from time to time (the “ Plan ”), a copy of which will be furnished to you. We expect that you will be appointed to the Board at the Board meeting to be held on August 17, 2011 and at this meeting the purchase of the Initial Shares would be approved by the Board. The Initial Shares shall vest as follows: 25% of the Initial Shares shall vest after 12 months of service on the Board and the remainder of the Initial Shares shall vest in 36 equal monthly installments as you continue service on the Board. Such vesting shall commence as of your election to the Board. The vesting of your Initial Shares shall accelerate fully upon a change of control of the Company pursuant to and in accordance with the terms of the Plan. In addition, you will be offered the opportunity to purchase an additional 50,000 shares of the Company’s Common Stock in connection with the Company’s proposed initial public offering (the “ Subsequent Shares ”). The Subsequent Shares shall not be subject to vesting. Finally, in connection with the Company’s proposed initial public offering, the Company intends to implement a compensation policy for members of the Board and you will participate in the program we implement.

For so long as you are a member of the Board, the Company will reimburse you for your reasonable out-of-pocket expenses, including reasonable travel expenses, incurred in attending Company Board meetings and committee meetings and in carrying out your duties as a director or committee member.

You understand that, if elected, you will serve on the Board at the pleasure of the stockholders of Company. You know of no reason why you would be precluded from serving as a member of the Board or any of its committees, either because of existing competition restrictions or fiduciary duty obligations or otherwise.

On behalf of the Company, we are excited about the possibility of having you join us at this critical juncture in our growth and development.

 

Sincerely,
Shlomo Kramer,
Chief Executive Officer

Acknowledged and agreed to on

this 20th day of July, 2011

 

/s/ Frank Slootman
Frank Slootman

EXHIBIT 10.22

INCAPSULA, INC.

AMENDMENT NO. 2 TO THE

SERIES A AND SERIES A-1 PREFERRED STOCK PURCHASE AGREEMENT

THIS AMENDMENT NO. 2 TO THE SERIES A AND SERIES A-1 PREFERRED STOCK PURCHASE AGREEMENT (the “ Amendment ”) is made by and among Incapsula, Inc., a Delaware corporation (the “ Company ”), and the undersigned investor of the Company (the “ Investor ”), as of this 24 th day of October, 2011.

RECITALS

WHEREAS, the Company and the Investor are parties to that certain Series A and Series A-1 Preferred Stock Purchase Agreement, dated March 9, 2010, (the “ Purchase Agreement ”);

WHEREAS, the Company and Investor previously entered into that certain Amendment No. 1 to the Series A and Series A-l Preferred Stock Purchase Agreement on December 31, 2010; and

WHEREAS, the Company and Investor now desire to further amend the timing for the sale, if any, of Series A-l Preferred Stock; and

WHEREAS, the Investor holds a majority of the Conversion Shares (as defined in the Purchase Agreement) issued or issuable upon conversion of the Shares purchased pursuant to the Purchase Agreement, and the consent of such holders will bind all parties to the Purchase Agreement pursuant to Section 6.9 thereof.

NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:

 

  1.

Amendments to the Purchase Agreement

(a)        Pursuant to Section 6.9 of the Purchase Agreement, Section 1.3 of the Purchase Agreement is hereby amended and restated in its entirety to read as follows:

“1.3 Subsequent Sale of Series A-1 Preferred Stock .  If within eighteen (18) months of the Closing, the Company achieves those certain milestones as set forth on Exhibit B hereto (the “ Milestones ”), and the Chief Executive Officer of the Company certifies in writing to each investor that the Milestones have been achieved (the “ Company CEO Certification ”), then, subject to the terms and conditions of this Agreement including the provisions contained in the following paragraphs, each Investor will purchase and the Company will sell and issue at a “First” subsequent closing and a “Second” subsequent closing (each, a “Subsequent Closing”) that number of Series A-l Shares set forth opposite such Invstor’s name on Schedule B hereto for $0.80 per share.


First Subsequent Closing (if any) :  The First Subsequent Closing will occur in two tranches as follows: (1) the first tranche of the First Subsequent Closing shall occur within seven (7) days of the receipt by each Investor of the Company CEO Certification; and (2) the second tranche of the First Subsequent Closing shall occur on or before September 30, 2011 with the specific closing date to be mutually agreed upon by the Company and Investor.

Second Subsequent Closing (if any) :  The Second Subsequent Closing will be on or before March 31, 2012 with the specific closing date to be mutually agreed upon by the Company and Investor.

Any Series A-1 Shares sold pursuant to this Section 1.3 shall be deemed “Shares” for all purposes under this Agreement and any purchasers thereof shall be deemed to be an “Investor” under this Agreement and each of the Ancillary Agreements (as defined below) and any amendment thereof. Where appropriate, “Closing” shall be deemed to include a “Subsequent Closing” or any tranche thereof. Subject to the provisions contained in the following paragraph, the purchase and sale of the Series A-1 Shares shall take place at the Menlo Park, CA offices of Goodwin Proctor LLP, or at such other place as the Company and the Investor agree upon orally or in writing. At the Subsequent Closing or any tranche thereof, the Company shall deliver to each Investor a certificate representing the Series A-1 Shares that such Investor is purchasing pursuant to this Agreement against payment of the purchase price therefor by check or wire transfer, or any combination thereof.

Notwithstanding the foregoing, the board of directors of Imperva, Inc. (the “ Imperva Board ”) may conduct an audit of the Company’s achievement of the Milestones during a period of fourteen (14) days following receipt of the Company CEO Certification. In connection with such audit, the Company will provide the Imperva Board with reasonable access to the Company’s books and records as is necessary for the Imperva Board to determine whether the Milestones have been achieved. In the event that the Imperva Board concludes that any of the Milestones have not been achieved, then the Imperva Board shall submit to the Company a certification in writing specifying which Milestones have not been met and suggest three (3) potential independent third parties to arbitrate the dispute regarding completion of the Milestones (the “ Imperva Board Certification ”). Such arbitrator shall not be an officer, director, employee, consultant, family member, greater than live percent (5%) stockholder or direct competitor of either Imperva or the Company. Upon the Company’s receipt of the Imperva Board Certification, the Chief Executive Officer of the Company shall select one of the proposed arbitrators to conduct an audit to determine whether or not the Milestone(s) in question have been achieved by the Company. The Chief Executive Officer of the Company shall provide advance notice in writing


to the Imperva Board with the name of the arbitrator selected and the date the arbitrator’s audit is to commence. Prior to the commencement of the of the arbitrator’s audit, the arbitrator shall enter into a nondisclosure agreement, the form of which is reasonably acceptable to the Company. The arbitrator’s audit shall be completed within twenty-eight (28) days from the commencement date of the arbitrator’s audit. If the arbitrator determines that the Milestones in question were achieved, Imperva will bear all reasonable costs and expenses incurred by the arbitrator related to the audit, If, however, the arbitrator determines that the Milestones in question were not achieved, all reasonable costs and expenses incurred by the arbitrator in connection with the audit will be shared by the Company.”

(b)        Pursuant to Section 6.9 of the Purchase Agreement, Schedule B of the Purchase Agreement is hereby amended and restated in its entirety to read as follows:

Schedule B

Schedule of Investors (Series A-l Preferred Stock)

  First Subsequent Closing (Tranche #1)

 

Investor Name &  Address   Number of Shares of Series
A-1 Preferred Stock
  Total Purchase Price  of
Series A-1 Preferred Stock

Imperva, Inc.

3400 Bridge Parkway, Suites 200 Redwood City, CA 94065

  625,000   $500,000

  First Subsequent Closing (Tranche #2)

 

Investor Name &  Address   Number of Shares of Series
A-1 Preferred Stock
  Total Purchase Price  of
Series A-1 Preferred Stock

Imperva, Inc. 3400 Bridge Parkway, Suites 200 Redwood City, CA 94065

  3,750,000   $3,000,000

  Second Subsequent Closing

 

Investor Name &  Address   Number of Shares of Series
A-1 Preferred Stock
  Total Purchase Price  of
Series A-1 Preferred Stock

Imperva, Inc. 3400 Bridge Parkway, Suites 200 Redwood City, CA 94065

  4,375,000   $3,500,000


2.             Continued Validity of Purchase Agreement .  Except as amended hereby, the Purchase Agreement shall continue in full force and effect as originally constituted and is ratified and affirmed by the parties hereto.

3.             Successors and Assigns .  Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties.

4.             Governing Law .  This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California.

5.             Counterparts .  This Agreement may be executed in two or more-counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties have executed this Amendment No. 2 to the Series A and Series A-l Preferred Stock Purchase Agreement as of the date first above written.

 

 

COMPANY

By :/s/ Gur Shatz                                        

Name: Gur Shatz

Title:   CEO & President

IMPERVA, INC.

By: /s/ Shlomo Kramer                                

Name: Shlomo Kramer

Title:   President & CEO

EXHIBIT 10.23

2011 IMPERVA COMPENSATION PLAN

Objectives:

 

 

Reward strong performance against quotas through significant upside potential.

 

 

Drive new product, maintenance, professional services and training bookings.

 

 

Penetrate new accounts and win market share.

 

 

Improve customer satisfaction by leveraging multi-year and premium maintenance options.

Plan Participation:

This plan applies to member of the Imperva Sales Organization. This plan is effective from January 1, 2011 through December 31, 2011, and supersedes participation in other Imperva bonus or commission plans.

Compensation Plan Guidelines:

 

 

Sales Territory Assignments You will be assigned a sales territory consisting of a specific geographical area, product(s) and/or services, specific accounts or partners, distribution channel or some combination thereof. All territory assignments are made at Imperva’s sole discretion and can be modified at any time by Imperva sales management. All territory assignments must be approved by the VP Worldwide Sales.

 

 

Quotas You will be assigned, in writing, one or more Quotas that will be identified and communicated to you in your Goals Acknowledgement Form (GAF). Your performance against the individual sales Quota(s) set forth in your GAF will, in conjunction with other goals and objectives assigned by management, serve as a basis for measuring your overall performance.

Quota targets are allocated based on regional track designation. Track designation will determine start and end of each period and number of periods annually. Tiered commission rates will be applied by period, exceeding quota qualifies for rate acceleration. See GAF for details.

Employees that are newly hired or transfer into an eligible commission-based sales position from a non-commissionable one mid-quarter receive a prorated quota and commission target for that quarter as outlined in the table below:

 

Hire / Transfer Date

  

Prorated Quota / Commission Target

1 st of the month

   100% for that month

2 nd through the 15 th of the month

   50% for that month

After the 15 th of the month

   0%

 

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Commissions are uncapped unless the total deal size is over $5,000,000 USD per RSD involved. In this case the VP of Sales and VP Finance shall determine quota and commission.

 

 

Commissions and quota retirement shall be earned on maintenance only in cases where it is sold as part of a product order. Maintenance Renewals do not retire quota but may earn limited commissions from time to time and are subject to VP of Sales Operations approval. However, in the case of Director’s of Strategic Accounts and the corresponding Sales Engineer, Maintenance Renewals will retire quota and earn commissions.

 

 

Commission rates accelerate as quota attainment per period increases. Accelerated commission rates apply incrementally, not cumulatively.

 

 

Commissions earned in all cases are calculated based on net revenue (amount less commission/referral/royalty paid to partners/finders fees).

 

 

Discounting guidelines outlined in the then current Imperva discount policy must be adhered to in order to earn quota and commission credit, unless otherwise approved by the VP Worldwide Sales.

 

 

Term Licenses, Rentals and Multi-year Maintenance or SOC Services Contracts commission and quota credit is given when billable.

 

 

Should a multi-year contract have a cancellation clause or “out”, then only the portion of the contract considered “firm” shall be credited to Employee.

 

 

Special Quarterly Incentives Rules – Imperva sales management, at its discretion, may occasionally run special quarterly incentive programs. The terms of this agreement apply to the special programs and take precedence when program rules contradict.

 

 

Each member of the Imperva sales team will be required to sign the following document each time the plan is updated to participate in this plan:

 

   

An individualized “Goals Acknowledgement Form (GAF)” (Exhibit 1)

 

 

Each member of the Field or Corporate Sales teams will be required to sign a certification document quarterly prior to receiving end of quarter commission payments. This certification states that there have been no intentionally false or misleading statements, entries, omissions, commitments or other contingencies made on behalf of the Company which have not been reported to the finance or legal departments.

 

 

Commissions are deemed earned when bookings are billable per Imperva’s “Revenue Recognition Policy” which can be found on the Compass under Finance/ Financial Information and the Employee has signed and returned are required documents stated above. Imperva reserves the right to hold commission payments until the GAF is signed (unchanged) by Employee. Also no commissions shall be paid for any transaction that is inconsistent with or is contrary to the terms and conditions of Imperva’s revenue recognition policies or the terms and conditions of the applicable authorized agreement(s).

 

 

Shared Hosting Bookings.

 

   

When shared products are rented or purchased including any associated services, the following positions will receive commission and quota credit:

 

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Corporate Sales and Corporate Sales Management, MSSP Director, Sales AVP’s, RVP’s, VP’s and SVP.

Splits

 

 

Split distribution will not to exceed 100% of total booking. This will be determined on a case-by-case basis according to the selling level of effort. Commission and Quota credit will be split in accordance with the following guidelines unless a previously written agreement approved by the appropriate RVP(s) specifies otherwise:

 

   

25% of the portion of the transaction pertaining to the installation location(s) is credited to the team that supports the installation location(s) provided the install site(s) requires local sales support including customer calls, coordination of PS, education and training. The remainder of the transaction is credited to the team that is responsible for the primary selling effort which includes identifying the opportunity, qualifying the lead, developing the proposal, negotiating the deal and securing a signed purchase order.

 

   

For large enterprise customers that have multiple divisions or subsidiaries, a transaction will be split 25% to the team that owns the corporate relationship when the primary selling effort (i.e. lead qualification, development, negotiation, etc.) occurs at the installation site(s). This assumes that the customer’s headquarters location requires sales support. If no sales support is required at the headquarters location then 100% of the transaction will be credited to the team that supports the installation location(s).

 

 

All sales efforts by you or your channel partners outside of your territory must be approved in advance by your Regional VP of Sales and the VP Sales Operations. WITHOUT ADVANCE APPROVAL TO PURSUE A DEAL OUTSIDE OF YOUR TERRITORY OR WITHOUT PRIOR NOTIFICATION THAT YOUR CHANNEL PARTNER HAS ENGAGED IN A DEAL OUTSIDE OF YOUR TERRITORY, YOU MAY POTENTIALLY FORFEIT ANY COMMISSION OR QUOTA CREDIT RELATED TO THAT DEAL.

 

 

The VP of Worldwide Sales, in his/her sole discretion, may revise an individual split agreement or the policy at any time.

Commission Rates and Calculation for Bookings Goals

 

 

On the attached GAF (Exhibit 1), select the applicable commission rate based on the % of 2011 quota achieved and the eligible booking.

 

 

Multiply the eligible revenue dollars recognized by the applicable commission rate to determine the commission.

Commission Payment:

 

 

Payment of Commission – Earned commissions will be paid monthly. Payments will be calculated at the end of the month and paid within the next pay period in the following month.

 

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Payment of Quarterly Objectives – Earned quarterly objectives will be paid quarterly. Payments will be calculated at the end of the quarter and paid within the next pay period in the following month.

 

 

2010 Bookings – In those cases where commission was paid based upon the 2010 Plan, no additional commission or quota credit will be due under the 2011 Plan.

 

 

Adjustments – In cases where there are royalty payments or any other out of the ordinary costs, quota and commission credit earned will be based on the license price minus the royalty, discount(s), or out of the ordinary costs specific to the individual contract.

 

 

Conditional Orders (Try and Buys) – Commissions earned on all conditional bookings are paid when:

 

   

Contractually required written acceptance (by email or any other written communication) from customer is received by Imperva’s Finance via the Imperva Regional Sales Director or,

 

   

Contractually there is NO required written acceptance (by email or any other written communication) from customer and the Acceptance Period has been completed and no further notices are required from Customer for acceptance purposes.

 

   

Conditional terms have been approved in advance by VP Worldwide Sales and VP Worldwide Sales Operations.

 

 

Charge backs – If Imperva determines that an invoice is uncollectible, or if Imperva makes a refund or grants credit for payments made against any invoice, or if an order is reversed, all commissions and quota retirement credited to the Employee based on such transaction will be cancelled, and all payments made to the Employee will be reimbursed to Imperva through a reduction in future commissions due the Employee pursuant to this Plan, or in the event of a terminating employee, out of any other moneys due to the employee at Imperva’s sole option.

 

 

Commission Errors – Employees will promptly report any unearned commissions that have been paid by Imperva in error. All commission errors will be reimbursed to Imperva through a reduction in future commissions due the Employee pursuant to this plan, or in the event of a terminating employee, out of any other moneys due to the employee at Imperva’s sole option.

 

 

Territory/Account Re-Assignment – In the case where the territory or accounts are reassigned or changed, the Vice President Worldwide Sales will determine the time frame for when the account is assigned to the new sales person and becomes commissionable.

 

 

Change in Job Status – In the event of a transfer, leave of absence, or promotion, the employee shall receive commissions earned prior to the effective date per the terms of the plan. The VP Worldwide Sales and the VP of Finance have the right and discretion to jointly determine eligibility for commission credit per the terms of the plan, on revenue recognized after the effective date of the change in job status.

 

 

Termination of Employment – Payment will be made on commissions earned by the employee prior to his/her termination date (the last day worked) within 30 days of that date. No commissions will be due on deals that were initiated but not booked prior to separation from Imperva by the Employee.

 

 

House Accounts – At the discretion of the VP of Worldwide Sales and Regional Vice Presidents, certain established company accounts may be distinguished as “House

 

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Accounts” and will not be eligible for commission and quota credit. House Accounts can be Worldwide or Geographical (America’s, EMEA, and APJ) in nature.

 

 

Named Accounts – At the discretion of the VP of Worldwide Sales and Regional Vice Presidents, certain accounts may considered strategic in nature to the Company and may be assigned to specific Regional Sales Directors or Directors of Sales roles (“Named Accounts”).

Additional Plan Terms:

 

 

Employment at Will (America’s Only) – Consistent with other compensation and benefit programs, this Plan in no way creates a contract of employment and does not obligate Imperva to continue to employ the participant during the term of the Plan. All employees of Imperva are at-will employees.

 

 

Right to Change the Plan – Imperva reserves the right to change, terminate, amend, or repeal all or a portion of the Plan at any time, subject to senior management discretion.

 

 

Dispute Resolution – The VP Worldwide Sales in conjunction with the Director of Human Resources will make all decisions concerning the interpretation of this Plan, and such decision shall be final, binding and shall not be subject to appeal or modification. The Plan is to be interpreted in accordance with the laws of the State of California, USA. If any term of this plan is found to be in non-conformance with a given state, federal, or country law, that term will be unenforceable but will not negate other terms of this plan.

 

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Exhibit 1

Amended and Restated

Vice President WW Sales Goals Acknowledgement Form (GAF) for 2011 Plan Year

 

 

Employee:

  

 

Ralph Pisani

  

 

Annual Base Salary:

  

 

200,000

 

Position:

  

 

Vice President, WW Sales

  

 

Annual Incentive Target:

  

 

200,000

 

Territory:

  

 

World Wide

  

 

Total Compensation at Target:

  

 

400,000

 

Effective Date:

  

 

October 21, 2011

  

Article I.

Article II. Compensation Currency:

   USD

 

      Article III. Incentive Component               Plan Mechanics         Payout
Frequency
 

Annual

incentive

@ 100%

   

1.       Territory Annual Quota (USD): As provided in Imperva’s internal operating plan

         
 

 

Tiered commission rate
scheme as follows
1 :

 

      Monthly   75%
      Track: 3            

% Quota Attained

   

Commission

Rate Per

Period

                 
      Period   Span   Quota                                
    1   January - March   As provided in Imperva’s internal operating plan           0% - 100%      0.15%            
    2   April - June   As provided in Imperva’s internal operating plan           100% - 110%      0.22%            
    3   July - September   As provided in Imperva’s internal operating plan           + 110%      0.30%            
    4   October - December   As provided in Imperva’s internal operating plan                                

 

1  

The VP of Finance will review quota and commission credit on any deals greater than $5 million.

 

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2.       Revenue Target (USD): As provided in Imperva’s internal operating plan

 

      We recognize product and license revenue when persuasive evidence of an arrangement exists, the product has been delivered, there are no uncertainties surrounding product acceptance, there are no significant future performance obligations, the license fees are fixed or determinable, and collection of the license fee is considered probable.   Quarterly   25%
     

 

  Period  

  Span   Quota                
    1   January - March   As provided in Imperva’s internal operating plan            
    2   April - June   As provided in Imperva’s internal operating plan            
    3   July - September   As provided in Imperva’s internal operating plan            
    4   October - December   As provided in Imperva’s internal operating plan            
                             

By signing below, I acknowledge that I have received, understand and agree to the terms of my CY2011 compensation plan which incorporates the CY 2011 GAF by reference. I further acknowledge that Imperva management reserves the right to change the terms of the CY 2011 compensation plan from time to time at any time during CY 2011. I understand that I will not earn the commissions specified on this schedule unless/until I have signed and returned this form.

 

Employee Signature:   

/s/ Ralph Pisani

      Date:    10/24/2011
Manager Signature:   

/s/ Shlomo Kramer

      Date:    10/24/2011

Fax to Corporate

Or scan and email to:

           

 

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EXHIBIT 10.24

2011 IMPERVA COMPENSATION PLAN

Objectives:

 

 

Reward strong performance against quotas through significant upside potential.

 

 

Drive new product, maintenance, professional services and training bookings.

 

 

Penetrate new accounts and win market share.

 

 

Improve customer satisfaction by leveraging multi-year and premium maintenance options.

Plan Participation:

This plan applies to member of the Imperva Sales Organization. This plan is effective from January 1, 2011 through December 31, 2011, and supersedes participation in other Imperva bonus or commission plans.

Compensation Plan Guidelines:

 

 

Sales Territory Assignments You will be assigned a sales territory consisting of a specific geographical area, product(s) and/or services, specific accounts or partners, distribution channel or some combination thereof. All territory assignments are made at Imperva’s sole discretion and can be modified at any time by Imperva sales management. All territory assignments must be approved by the VP Worldwide Sales.

 

 

Quotas You will be assigned, in writing, one or more Quotas that will be identified and communicated to you in your Goals Acknowledgement Form (GAF). Your performance against the individual sales Quota(s) set forth in your GAF will, in conjunction with other goals and objectives assigned by management, serve as a basis for measuring your overall performance.

Quota targets are allocated based on regional track designation. Track designation will determine start and end of each period and number of periods annually. Tiered commission rates will be applied by period, exceeding quota qualifies for rate acceleration. See GAF for details.

Employees that are newly hired or transfer into an eligible commission-based sales position from a non-commissionable one mid-quarter receive a prorated quota and commission target for that quarter as outlined in the table below:

 

Hire / Transfer Date

  

Prorated Quota / Commission Target

1 st of the month

   100% for that month

2 nd through the 15 th of the month

   50% for that month

After the 15 th of the month

   0%

 

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Commissions are uncapped unless the total deal size is over $5,000,000 USD per RSD involved. In this case the VP of Sales and VP Finance shall determine quota and commission.

 

 

Commissions and quota retirement shall be earned on maintenance only in cases where it is sold as part of a product order. Maintenance Renewals do not retire quota but may earn limited commissions from time to time and are subject to VP of Sales Operations approval. However, in the case of Director’s of Strategic Accounts and the corresponding Sales Engineer, Maintenance Renewals will retire quota and earn commissions.

 

 

Commission rates accelerate as quota attainment per period increases. Accelerated commission rates apply incrementally, not cumulatively.

 

 

Commissions earned in all cases are calculated based on net revenue (amount less commission/referral/royalty paid to partners/finders fees).

 

 

Discounting guidelines outlined in the then current Imperva discount policy must be adhered to in order to earn quota and commission credit, unless otherwise approved by the VP Worldwide Sales.

 

 

Term Licenses, Rentals and Multi-year Maintenance or SOC Services Contracts commission and quota credit is given when billable.

 

 

Should a multi-year contract have a cancellation clause or “out”, then only the portion of the contract considered “firm” shall be credited to Employee.

 

 

Special Quarterly Incentives Rules – Imperva sales management, at its discretion, may occasionally run special quarterly incentive programs. The terms of this agreement apply to the special programs and take precedence when program rules contradict.

 

 

Each member of the Imperva sales team will be required to sign the following document each time the plan is updated to participate in this plan:

 

   

An individualized “Goals Acknowledgement Form (GAF)” (Exhibit 1)

 

 

Each member of the Field or Corporate Sales teams will be required to sign a certification document quarterly prior to receiving end of quarter commission payments. This certification states that there have been no intentionally false or misleading statements, entries, omissions, commitments or other contingencies made on behalf of the Company which have not been reported to the finance or legal departments.

 

 

Commissions are deemed earned when bookings are billable per Imperva’s “Revenue Recognition Policy” which can be found on the Compass under Finance/ Financial Information and the Employee has signed and returned are required documents stated above. Imperva reserves the right to hold commission payments until the GAF is signed (unchanged) by Employee. Also no commissions shall be paid for any transaction that is inconsistent with or is contrary to the terms and conditions of Imperva’s revenue recognition policies or the terms and conditions of the applicable authorized agreement(s).

 

 

Shared Hosting Bookings.

 

   

When shared products are rented or purchased including any associated services, the following positions will receive commission and quota credit:

 

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Corporate Sales and Corporate Sales Management, MSSP Director, Sales AVP’s, RVP’s, VP’s and SVP.

Splits

 

 

Split distribution will not to exceed 100% of total booking. This will be determined on a case-by-case basis according to the selling level of effort. Commission and Quota credit will be split in accordance with the following guidelines unless a previously written agreement approved by the appropriate RVP(s) specifies otherwise:

 

   

25% of the portion of the transaction pertaining to the installation location(s) is credited to the team that s upports the in stallation location(s) provided the install site(s) requires local sales support including customer calls, coordination of PS, education and training. The remainder of the transaction is credited to the team that is responsible for the primary selling effort which includes identifying the opportunity, qualifying the lead, developing the proposal, negotiating the deal and securing a signed purchase order.

 

   

For large enterprise customers that have multiple divisions or subsidiaries, a transaction will be split 25% to the team that owns the corporate relationship when the primary selling effort (i.e. lead qualification, development, negotiation, etc.) occurs at the installation site(s). This assumes that the customer’s headquarters location requires sales support. If no sales support is required at the headquarters location then 100% of the transaction will be credited to the team that supports the installation location(s).

 

 

All sales efforts by you or your channel partners outside of your territory must be approved in advance by your Regional VP of Sales and the VP Sales Operations. WITHOUT ADVANCE APPROVAL TO PURSUE A DEAL OUTSIDE OF YOUR TERRITORY OR WITHOUT PRIOR NOTIFICATION THAT YOUR CHANNEL PARTNER HAS ENGAGED IN A DEAL OUTSIDE OF YOUR TERRITORY, YOU MAY POTENTIALLY FORFEIT ANY COMMISSION OR QUOTA CREDIT RELATED TO THAT DEAL.

 

 

The VP of Worldwide Sales, in his/her sole discretion, may revise an individual split agreement or the policy at any time.

Commission Rates and Calculation for Bookings Goals

 

 

On the attached GAF (Exhibit 1), select the applicable commission rate based on the % of 2011 quota achieved and the eligible booking.

 

 

Multiply the eligible revenue dollars recognized by the applicable commission rate to determine the commission.

Commission Payment:

 

 

Payment of Commission – Earned commissions will be paid monthly. Payments will be calculated at the end of the month and paid within the next pay period in the following month.

 

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Payment of Quarterly Objectives – Earned quarterly objectives will be paid quarterly. Payments will be calculated at the end of the quarter and paid within the next pay period in the following month.

 

 

2010 Bookings – In those cases where commission was paid based upon the 2010 Plan, no additional commission or quota credit will be due under the 2011 Plan.

 

 

Adjustments – In cases where there are royalty payments or any other out of the ordinary costs, quota and commission credit earned will be based on the license price minus the royalty, discount(s), or out of the ordinary costs specific to the individual contract.

 

 

Conditional Orders (Try and Buys) – Commissions earned on all conditional bookings are paid when:

 

   

Contractually required written acceptance (by email or any other written communication) from customer is received by Imperva’s Finance via the Imperva Regional Sales Director or,

 

   

Contractually there is NO required written acceptance (by email or any other written communication) from customer and the Acceptance Period has been completed and no further notices are required from Customer for acceptance purposes.

 

   

Conditional terms have been approved in advance by VP Worldwide Sales and VP Worldwide Sales Operations.

 

 

Charge backs – If Imperva determines that an invoice is uncollectible, or if Imperva makes a refund or grants credit for payments made against any invoice, or if an order is reversed, all commissions and quota retirement credited to the Employee based on such transaction will be cancelled, and all payments made to the Employee will be reimbursed to Imperva through a reduction in future commissions due the Employee pursuant to this Plan, or in the event of a terminating employee, out of any other moneys due to the employee at Imperva’s sole option.

 

 

Commission Errors – Employees will promptly report any unearned commissions that have been paid by Imperva in error. All commission errors will be reimbursed to Imperva through a reduction in future commissions due the Employee pursuant to this plan, or in the event of a terminating employee, out of any other moneys due to the employee at Imperva’s sole option.

 

 

Territory/Account Re-Assignment – In the case where the territory or accounts are reassigned or changed, the Vice President Worldwide Sales will determine the time frame for when the account is assigned to the new sales person and becomes commissionable.

 

 

Change in Job Status – In the event of a transfer, leave of absence, or promotion, the employee shall receive commissions earned prior to the effective date per the terms of the plan. The VP Worldwide Sales and the VP of Finance have the right and discretion to jointly determine eligibility for commission credit per the terms of the plan, on revenue recognized after the effective date of the change in job status.

 

 

Termination of Employment – Payment will be made on commissions earned by the employee prior to his/her termination date (the last day worked) within 30 days of that date. No commissions will be due on deals that were initiated but not booked prior to separation from Imperva by the Employee.

 

 

House Accounts – At the discretion of the VP of Worldwide Sales and Regional Vice Presidents, certain established company accounts may be distinguished as “House

 

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Accounts” and will not be eligible for commission and quota credit. House Accounts can be Worldwide or Geographical (America’s, EMEA, and APJ) in nature.

 

 

Named Accounts – At the discretion of the VP of Worldwide Sales and Regional Vice Presidents, certain accounts may considered strategic in nature to the Company and may be assigned to specific Regional Sales Directors or Directors of Sales roles (“Named Accounts”).

Additional Plan Terms:

 

 

Employment at Will (America’s Only) Consistent with other compensation and benefit programs, this Plan in no way creates a contract of employment and does not obligate Imperva to continue to employ the participant during the term of the Plan. All employees of Imperva are at-will employees.

 

 

Right to Change the Plan – Imperva reserves the right to change, terminate, amend, or repeal all or a portion of the Plan at any time, subject to senior management discretion.

 

 

Dispute Resolution – The VP Worldwide Sales in conjunction with the Director of Human Resources will make all decisions concerning the interpretation of this Plan, and such decision shall be final, binding and shall not be subject to appeal or modification. The Plan is to be interpreted in accordance with the laws of the State of California, USA. If any term of this plan is found to be in non-conformance with a given state, federal, or country law, that term will be unenforceable but will not negate other terms of this plan.

 

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Exhibit 1

Amended and Restated

Vice President Business Operations Goals Acknowledgement Form (GAF) for 2011 Plan Year

 

 

Employee:

   Jason Forget    Annual Base Salary:    185,000

 

Position:

   VP Business Operations    Annual Incentive Target:    75,000

 

Territory:

   World Wide    Total Compensation at Target:    260,000

 

Effective Date:

  

 

October 21, 2011

  

Article I.

Article II. Compensation Currency:

   USD

 

      Article III. Incentive Component               Plan Mechanics         Payout
Frequency
 

Annual
incentive

@ 100%

   

1.       Territory Annual Quota (USD): As provided in Imperva’s internal operating plan

       
 

 

Tiered commission rate
scheme as follows
1 :

 

    Monthly   50%
      Track:  3          

% Quota Attained

    Commission
Rate Per
Period
             
    Period   Span   Quota                
    1   January - March   As provided in Imperva’s internal operating plan         0% - 100%      0.04%        
    2   April - June   As provided in Imperva’s internal operating plan         100% - 110%      0.06%        
    3   July - September   As provided in Imperva’s internal operating plan         + 110%      0.07%        
    4   October - December   As provided in Imperva’s internal operating plan                  
   

2.       Quarterly Objective

           
 

 

Objectives to be defined
in each quarter

 

     

Quarterly

 

 

50%

 

 

1  

The VP of Sales and VP of Finance will review quota and commission credit on any deals greater than $5 million.

 

6 of 7    


By signing below, I acknowledge that I have received, understand and agree to the terms of my CY2011 compensation plan which incorporates the CY 2011 GAF by reference. I further acknowledge that Imperva management reserves the right to change the terms of the CY 2011 compensation plan from time to time at any time during CY 2011. I understand that I will not earn the commissions specified on this schedule unless/until I have signed and returned this form.

 

Employee Signature:  

/s/ Jason Forget

    Date:   10/21/2011
Manager Signature:  

/s/ Shlomo Kramer

    Date:   10/24/2011

Fax to Corporate

Or scan and email to:

       

 

7 of 7    

Exhibit 23.1

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm

We consent to the reference to our firm under the caption “Experts” and to the use of our report dated June 17, 2011 (except for the last paragraph of Note 1, as to which the date is October     , 2011), in Amendment No. 4 to the Registration Statement (Form S-1 No. 333-175008) and related Prospectus of Imperva, Inc. for the registration of shares of its common stock.

Ernst & Young LLP

Redwood City, California

The foregoing consent is in the form that will be signed upon the completion of the restatement of capital accounts described in the last paragraph of Note 1 to the financial statements.

/s/    Ernst & Young LLP

Redwood City, California

October 27, 2011

Exhibit 23.2

Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global,

Independent Registered Public Accounting Firm

We consent to the reference to our firm under the caption “Experts” and to the use of our report dated June 17, 2011 (except for the last paragraph of Note 1, as to which the date is October     , 2011), in Amendment No. 4 to the Registration Statement (Form S-1 No. 333-175008) and related Prospectus of Imperva, Inc. for the registration of shares of its common stock.

     Kost Forer Gabbay & Kasierer

     A Member of Ernst & Young Global

Tel-Aviv, Israel

The foregoing consent is in the form that will be signed upon the completion of the restatement of capital accounts described in the last paragraph of Note 1 to the financial statements.

/s/ Kost Forer Gabbay & Kasierer

     A Member of Ernst & Young Global

Tel-Aviv, Israel

October 27, 2011