Design Therapeutics, Inc. Stock Compensation Disclosure

9. Stock-Based Compensation

Equity Incentive Award Plans

In March 2021, the Company adopted the 2021 Plan. Upon adoption of the 2021 Plan, the Company restricted future grants from its 2018 Plan.

Under the 2021 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock awards, performance cash awards and other forms of stock awards to employees, directors and consultants, including employees and consultants of the Company’s affiliates. As of December 31, 2024, the Company had 6,122,854 shares available for grant under the 2021 Plan. In addition, the number of shares of common stock available for issuance under the 2021 Plan will automatically increase on January 1 of each calendar year through January 1, 2031 in an amount equal to 5% of the total number of shares outstanding of the Company’s common stock on the last day of the calendar month before the date of each automatic increase, or a lesser number of shares determined by the Company’s board of directors. Effective January 1, 2025, the number of shares available for future issuance was increased by 2,837,717 shares so that the total available for future issuance as of January 1, 2025 was 8,960,571 shares.

In August 2023, the Company granted two stock options, each to purchase up to 525,000 shares of the Company's common stock, which contain both time-based and performance-based conditions. The options have a weighted average grant date fair value of $1.64 per share. Stock-based compensation expense for awards with performance conditions is recognized straight-line over the expected performance period when the achievement of such performance conditions is determined to be probable. The Company assessed the probability of achieving the performance-based conditions and recorded approximately $0.2 million and $0.1 million in general and administrative stock-based compensation expense during the years ended December 31, 2024 and 2023, respectively.

The weighted-average grant date fair value per share of options granted was $2.11 and $3.45 for the years ended December 31, 2024 and 2023, respectively. The aggregate intrinsic value of options exercised was $0.1 million and $0.7 million for the years ended December 31, 2024 and 2023, respectively, and the cash received from options exercised was $36,000 and $0.4 million for the years ended December 31, 2024 and 2023, respectively.

The Company determines the assumptions used in the option pricing model in the following manner:

Expected Term—The expected term of stock options represents the period of time that the awards are expected to be outstanding. Because the Company does not have sufficient historical exercise behavior, it determines the expected term assumption using the simplified method for employees and board members, which calculates the expected term as the average time-to-vesting and the contractual life of the award. The expected term for non-employees is generally the contractual term.

Expected Volatility—Given the Company's limited historical stock price volatility data, the expected volatility assumption was determined by examining the historical volatilities of a group of industry peers whose share prices are publicly available.

Risk-Free Interest Rate—The risk-free rate assumption is based on the U.S. Treasury yield in effect at the time of the grant with maturities consistent with the expected term of the awards.

Expected Dividend Yield—The expected dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The Company has not paid and does not intend to pay dividends and, therefore, used an expected dividend yield of zero.

2021 Employee Stock Purchase Plan

In March 2021, the Company adopted the ESPP. The ESPP permits eligible employees who elect to participate in an offering under the ESPP to have up to 15% of their eligible earnings withheld, subject to certain limitations, to purchase shares of common stock pursuant to the ESPP. The price of common stock purchased under the ESPP is equal to 85% of the lower of the fair market value of the common stock at the commencement date of each offering period or the relevant date of purchase.

As of December 31, 2024, the Company had issued 376,386 shares of the Company's common stock under the ESPP and had 1,904,599 shares available for future issuance. In addition, the number of shares of common stock available for issuance under the ESPP will automatically increase on January 1 of each calendar year through January 1, 2031 in an amount equal to the lesser of (i) 1% of the total number of shares outstanding of the Company’s common stock on the last day of the calendar month before the date of each automatic increase and (ii) 1,200,000 shares; provided that before the date of any such increase, the Company’s board of directors may determine that such increase will be less than the amount set forth in clauses (i) and (ii). Effective January 1, 2025, the number of shares available for issuance was increased by 567,543 shares so that the total available for future issuance as of January 1, 2025 was 2,472,142 shares.

As of December 31, 2024, unrecognized compensation expense related to unvested stock option awards was $17.1 million, which is expected to be recognized in expense over a weighted-average period of 1.3 years. As of December 31, 2024, unrecognized compensation expense related to ESPP rights was $0.5 million, which is expected to be recognized over a remaining period of 1.9 years.