Cloudflare, Inc.NET
Cloudflare, Inc. Stock Compensation Disclosure
Stock-based Compensation
Equity Incentive Plans
The Company's 2019 Equity Incentive Plan (2019 Plan) provides for the granting of stock options, restricted stock, RSUs, stock appreciation rights, performance shares, PSUs, and performance awards for the Company's Class A common stock to the Company's employees, directors, and consultants. The maximum number of shares of Class A common stock that may be issued under the 2019 Plan will not exceed 66,661,953 shares of the Company's Class A common stock. Stock-based awards under the 2019 Plan that expire or are forfeited, canceled, or repurchased generally are returned to the pool of shares of Class A common stock available for issuance under the 2019 Plan. In addition, the number of shares of the Company's Class A common stock reserved for issuance under the 2019 Plan will automatically increase on January 1 of each calendar year through January 1, 2029, in an amount equal to the least of (i) 29,335,000 shares, (ii) 5% of the total number of shares of Class A and Class B common stock outstanding on December 31 of the fiscal year before the date of each automatic increase, or (iii) a lesser number of
shares determined by the compensation committee of the Company's Board of Directors prior to the applicable January 1.
The 2010 Plan was terminated prior to the effectiveness of the 2019 Plan and the Company ceased granting any additional awards under the 2010 Plan. All outstanding awards under the 2010 Plan at the time of the termination of the 2010 Plan remain subject to the terms of the 2010 Plan, and any shares underlying stock options that expire or terminate or are forfeited or repurchased by the Company under the 2010 Plan will be automatically transferred to the 2019 Plan.
Stock Options
Under the 2010 Plan and 2019 Plan, at exercise, stock option awards entitle the holder to receive one share of Class B or Class A common stock, in the case of the 2010 Plan, or one share of Class A common stock, in the case of the 2019 Plan. The stock options granted under the 2010 Plan and the 2019 Plan generally vest over a four-year period subject to remaining continuously employed and expire no more than 10 years from the date of grant. The following table summarizes the stock options activity under the 2010 Plan and 2019 Plan during the periods presented:
| Stock Options Outstanding | |||||||||||||||||||||||
| (in thousands, except year and per share data) | |||||||||||||||||||||||
| Shares Subject to Options Outstanding | Weighted- Average Exercise Price per Option | Weighted- Average Remaining Contractual Terms (in years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Balances as of December 31, 2022 | 15,886 | $ | 34.21 | 6.3 | $ | 451,782 | |||||||||||||||||
| Options granted | 1,290 | $ | 51.21 | ||||||||||||||||||||
| Options exercised | (2,989) | $ | 4.96 | $ | 171,225 | ||||||||||||||||||
| Options canceled/forfeited/expired | (1,664) | $ | 62.62 | ||||||||||||||||||||
| Balances as of December 31, 2023 | 12,523 | $ | 21.03 | 5.7 | $ | 787,633 | |||||||||||||||||
| Options granted | 625 | $ | 81.45 | ||||||||||||||||||||
| Options exercised | (2,984) | $ | 4.33 | $ | 257,941 | ||||||||||||||||||
| Options canceled/forfeited/expired | (1,317) | $ | 48.00 | ||||||||||||||||||||
| Balances as of December 31, 2024 | 8,847 | $ | 26.91 | 5.1 | $ | 720,364 | |||||||||||||||||
| Options granted | 207 | $ | 142.36 | ||||||||||||||||||||
| Options exercised | (2,342) | $ | 14.15 | $ | 383,926 | ||||||||||||||||||
| Options canceled/forfeited/expired | (1,051) | $ | 53.03 | ||||||||||||||||||||
| Balances as of December 31, 2025 | 5,661 | $ | 31.56 | 4.5 | $ | 937,438 | |||||||||||||||||
| Vested and expected to vest as of December 31, 2025 | 5,661 | $ | 31.56 | 4.5 | $ | 937,438 | |||||||||||||||||
| Exercisable as of December 31, 2025 | 3,117 | $ | 10.16 | 2.5 | $ | 582,861 | |||||||||||||||||
The aggregate intrinsic value is the difference between the exercise price of the option and the estimated fair value of the underlying common stock. There were no options exercisable and unvested as of December 31, 2025 and December 31, 2024.
The total grant date fair value for vested options in the years ended December 31, 2025, 2024, and 2023 was $2.7 million, $7.8 million, and $15.5 million, respectively.
The Company has granted to certain executive officers and other key employees 10-year stock options with market conditions that vest and become exercisable to purchase shares of the Company's Class A common stock if the Company achieves certain stock price milestones and the employee continues to provide services to the Company through the applicable vesting dates (the Performance Options). The Performance Options were granted under the 2019 Plan. As of December 31, 2025, there were approximately 2.5 million outstanding Performance Options.
The weighted-average assumptions used to determine the fair value of the Performance Options during the periods presented were as follows:
| Year ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Expected term (in years) | 10.0 | 10.0 | 10.0 | ||||||||||||||
| Expected volatility | 61.0 | % | 60.6 | % | 63.7 | % | |||||||||||
| Risk-free interest rate | 4.5 | % | 4.2 | % | 3.9 | % | |||||||||||
| Dividend yield | — | — | — | ||||||||||||||
The weighted-average grant date fair value per share of the Performance Options granted for the years ended December 31, 2025, 2024, and 2023 was $94.04, $52.09, and $52.13, respectively.
The Company recorded a reversal of stock-based compensation expense of $25.9 million during the year ended December 31, 2025 due to forfeitures of the Performance Options upon key employee departures. The total stock-based compensation expense for the Performance Options for the years ended December 31, 2025, 2024, and 2023 were $20.6 million, $32.7 million, and $33.5 million, respectively. As of December 31, 2025, there was $70.0 million of unrecognized stock-based compensation expense related to the Performance Options that is expected to be recognized over a weighted-average period of 3.1 years.
Restricted Stock Units and Performance Stock Units
RSUs granted under the 2010 Plan generally vest upon the satisfaction of both a service-based vesting condition and a performance vesting condition. RSUs granted under the 2019 Plan generally vest upon the satisfaction of a service-based vesting condition. The service-based vesting condition for employees under both the 2010 Plan and the 2019 Plan is typically satisfied over a four-year period, subject to remaining continuously employed.
All PSUs granted under the 2019 Plan on or before December 31, 2025 will vest upon the achievement of financial performance or market conditions, subject to continued service through the applicable vesting dates.
On February 5, 2025, the Company’s Board of Directors granted to the Company’s CEO and President (each, a Co-Founder) an aggregate of 350,220 PSUs with market conditions that vest if the Company achieves certain stock price milestones and the Co-Founders, individually, continue to provide service to the Company through the applicable vesting dates.
The weighted average assumptions used to determine the fair value of the Co-Founder PSUs with market conditions were as follows:
| 2025 | |||||
| Expected term (in years) | 7.0 | ||||
| Expected volatility | 64.7 | % | |||
| Risk-free interest rate | 4.3 | % | |||
| Dividend yield | — | ||||
RSU and PSU activity under the 2019 Plan and the 2010 Plan for the year ended December 31, 2025 was as follows:
RSUs and PSUs | Weighted-Average Grant Date Fair Value | ||||||||||
| (in thousands, except per share data) | |||||||||||
| Unvested and outstanding as of December 31, 2022 | 9,580 | $ | 61.14 | ||||||||
| Granted - RSUs | 6,428 | $ | 62.24 | ||||||||
| Vested - RSUs | (3,689) | $ | 56.75 | ||||||||
| Forfeited - RSUs | (1,161) | $ | 65.87 | ||||||||
| Unvested as of December 31, 2023 | 10,894 | $ | 65.93 | ||||||||
| Vested and not yet released | — | $ | — | ||||||||
| Outstanding as of December 31, 2023 | 10,894 | $ | 65.93 | ||||||||
| Granted - RSUs and PSUs | 7,460 | $ | 89.17 | ||||||||
| Vested - RSUs | (4,226) | $ | 69.43 | ||||||||
| Forfeited - RSUs | (2,267) | $ | 65.56 | ||||||||
Unvested as of December 31, 2024 | 11,861 | $ | 79.37 | ||||||||
| Vested and not yet released | 18 | $ | 57.66 | ||||||||
Outstanding as of December 31, 2024 | 11,879 | $ | 79.34 | ||||||||
| Granted - RSUs and PSUs | 4,884 | $ | 144.32 | ||||||||
| Vested - RSUs and PSUs | (4,665) | $ | 84.77 | ||||||||
| Forfeited - RSUs and PSUs | (1,750) | $ | 84.07 | ||||||||
Unvested as of December 31, 2025 | 10,330 | $ | 106.84 | ||||||||
| Vested and not yet released | 1 | $ | 68.12 | ||||||||
Outstanding as of December 31, 2025 | 10,331 | $ | 106.84 | ||||||||
The total grant date fair value for vested RSUs and PSUs were $395.5 million, $293.4 million, and $209.4 million for the years ended December 31, 2025, 2024 and 2023, respectively. The total stock-based compensation expense for RSUs and PSUs were $430.8 million, $300.0 million, and $219.6 million for the years ended December 31, 2025, 2024 and 2023, respectively. As of December 31, 2025, the total unrecognized stock-based compensation expense related to RSUs and PSUs was $967.9 million that is expected to be recognized over a weighted-average period of 3.0 years. The number of PSUs granted during the years ended December 31, 2025 and 2024 were not material. The total stock-based compensation expense for PSUs was $17.2 million and not material for the years ended December 31, 2025 and 2024, respectively. As of December 31, 2025, the total unrecognized stock-based compensation related to PSUs with market conditions was $24.3 million and is expected to be recognized over a weighted-average period of 2.2 years.
2019 Employee Stock Purchase Plan
The ESPP allows eligible employees to purchase shares of the Company's Class A common stock through payroll deductions up to 10% of their eligible compensation and provides six-month offering periods beginning in November and May of each year with identical purchase periods. Class A common stock will be purchased for the accounts of employees participating in the ESPP at a price per share that is the lesser of (1) 85% of the fair market value of a share of the Company's Class A common stock on the first date of an offering period, or (2) 85% of the fair market value of a share of the Company's Class A common stock on the date of purchase. The number of shares of Class A common stock reserved for issuance includes an annual increase on the first day of each fiscal year by the least of (1) 5,870,000 shares of Class A common stock, (2) 1% of the total number of shares of Class A and Class B common stock outstanding on December 31 of the fiscal year before the date of each automatic increase; or (3) such lesser amount as the compensation committee of the Company's Board of Directors may determine prior to the applicable January 1.
During the years ended December 31, 2025 and 2024, respectively, 267,068 and 326,515 shares of Class A common stock were purchased under the ESPP. As of December 31, 2025, the total unrecognized stock-based compensation expense related to the ESPP was $4.0 million and is expected to be recognized over a weighted-average period of 0.4 years.
The weighted-average assumptions used to determine the fair value of the ESPP during the periods presented were as follows:
| Year ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Expected term (in years) | 0.5 | 0.5 | 0.5 | ||||||||||||||
| Risk-free interest rate | 4.1 | % | 4.9 | % | 5.2 | % | |||||||||||
| Expected volatility | 52.0 | % | 46.7 | % | 68.9 | % | |||||||||||
| Dividend yield | — | — | — | ||||||||||||||
Stock-based Compensation Expense
The following table sets forth the total stock-based compensation expense included in the Company’s consolidated statements of operations:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Cost of revenue | $ | 13,043 | $ | 10,911 | $ | 7,967 | |||||||||||
| Sales and marketing | 127,868 | 91,464 | 73,682 | ||||||||||||||
| Research and development | 156,140 | 143,589 | 132,417 | ||||||||||||||
| General and administrative | 154,403 | 92,497 | 59,923 | ||||||||||||||
| Total stock-based compensation expense | $ | 451,454 | $ | 338,461 | $ | 273,989 | |||||||||||
About Stock Compensation Disclosures
Stock-based compensation disclosures detail the equity awards granted to employees and executives — including stock options, restricted stock units (RSUs), and performance shares — along with the valuation methods and assumptions used to expense them. This section reveals the true cost of talent retention and the alignment between management incentives and shareholder interests.
Key signals: total unrecognized compensation expense and its expected recognition period signal future earnings headwinds from already-granted awards. For stock options, examine Black-Scholes assumptions — expected volatility, risk-free rate, and expected term — as understating any of these reduces reported compensation expense. Compare stock compensation expense as a percentage of revenue against peers to assess dilution cost. Watch vesting schedules for acceleration clauses tied to change-of-control events. Performance-based awards with undemanding targets may indicate weak governance. Add back stock compensation to operating cash flow to calculate a more conservative free cash flow figure.