Twilio
Annual Report 2017

Plain-text annual report

Annual Report 2 0 1 7 KEY METRICS REVENUE ($M) 1 ACTIVE CUSTOMER ACCOUNT S (K ) 2 399.0 365.5 49.0 Base Total 88.8 75.7 49.9 41.8 277.3 245.5 166.9 136.9 36.6 25.3 16.6 11.0 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 D O L L A R - B A S E D N E T E X PA N S I O N R ATE 3 170% 153 % 155 % 161 % 128% 2013 2014 2015 2016 2017 1 Revenue ($M) – For the twelve months ended December 31 2 Active Customer Accounts (K) – As of December 31 3 Dollar-Based Net Expansion Rate – For the twelve months ended December 31 Dear Fellow Stockholders, Every two weeks, we hold an all-hands meeting where we gather our employees live and via video to discuss our business. Since the beginning, I’ve opened that meeting by showing several of the most interesting tweets from our community that week celebrating the novel ideas we’re helping to bring to life. It’s a constant reminder that although we’ve been doing this for 10 years, every month there are thousands of developers and companies discovering Twilio for the first time, having the ‘‘a-ha’’ moments, realizing new things they can build with Twilio. After hundreds of these all-hands meetings, I’m still awed by the creativity, ingenuity, and drive of our customers and I love sharing these tweets with the company. With that constantly renewed enthusiasm for Twilio’s customers, employees and opportunity, it’s my honor to pen our second annual stockholder letter as a public company. *** 2017 Recap *** During 2017, we hit a number of order of magnitude milestones for the business that I could scarcely imagine 10 years ago - our first $100 million dollar revenue quarter, 100 million messages sent in a day, 1,000 employees (Twilions!), and 100 countries where we provide phone numbers. We saw continued strong growth on many fronts in 2017. Year over year, Total Revenue grew by 44% and Base Revenue - the key customer metric we focus on - grew by 49%. We expanded the breadth and depth of our product line, added more fuel to our sales engine, and added hundreds of thousands of developers around the world to our platform. And we accomplished this growth while increasing the diversification of our business. The contribution from our top 10 customer accounts dropped to 19% in 2017 from 30% in 2016. While diversifying our revenue was not without pain, it has helped us build a stronger, more resilient company. The headline from the past year was the launch of the Engagement Cloud - a higher-level application platform that encompasses best practices and accelerates our customers’ ability to adopt Twilio while retaining the key platform flexibility. Products such as Studio (our drag-and-drop development environment) and our most recent addition, Flex (our contact center application platform), make it faster for customers to adopt Twilio. While C-level execs may not be intimately familiar with the details of our APIs (or care to be!), they certainly care about the value we can bring to their customer engagement, at a rapid pace, with the higher level benefits Twilio provides. The Engagement Cloud is a great vehicle to describe that value, and deliver on it with new products. At the Programmable Communications Cloud layer, we added further breadth and depth to our core voice and messaging offerings, and at the same time we launched new products aimed at helping our customers add more intelligence to their communications. We announced important new products like our Speech Recognition API, which leverages Google’s platform and capabilities in 119 languages, and Twilio Understand, our natural language understanding engine to power Interactive Voice Response (IVR) automation and bots in our customers’ communication flows. Twilio Wireless - our new platform for IoT innovation - began to deliver on its promise of powering innovation of connected devices. Although still in beta in 2017, we saw early stages of adoption by a broad set of customers. In fact, the last week in December saw our largest deployment of Twilio Wireless SIM cards to date. Although in its early stages, customers are validating our approach to the sizable IoT market. We also made big advancements in our Super Network - the base layer of our product stack with a mission to catalog, orchestrate, and deliver the world’s connectivity. We’re continually expanding our global footprint to open new opportunities for our customers, and in the past year we reached a significant milestone - we now have over 100 countries in our phone number catalog. This catalog now covers more than 90% of the world’s GDP and over 6 billion people. A momentous achievement by the team. Our developer-first go-to-market approach is a powerful one, and in 2017 we strengthened it considerably. I mentioned in last year’s letter the hiring of George Hu as Chief Operating Officer. George has helped us take our go-to-market effort to the next level in 2017. As evidenced by the new logos we’ve discussed throughout 2017, developers are bringing us into companies large and small, new and old, as their prominence within organizations rises. Establishing and maintaining an authentic presence in the developer community has been an important priority since the founding of Twilio - and we recently crossed the mark of 2 million developer accounts created on our platform. Throughout 2017, we added more resources and more coverage across our sales organization, and I’m very pleased with the results. We’re finding new opportunities in our existing customer base, as evidenced by our first enterprise license agreement this year (a three-year contract with nearly eight figures of total committed revenue), and we’re making continued inroads into traditional enterprises like Morgan Stanley, the General Services Administration (GSA), and National Debt Relief to name a few. In fact, we ended the year with nearly 10% of the Global 2000 as part of our active customer count. One of the joys of a platform is seeing customers solve problems you never knew existed! I’d like to make a habit of highlighting some of the unique ways customers used our platform in the last year, to showcase not just the known logos and big deals, but also the raw creative power of our customers. In 2017, we saw Age UK - the UK’s largest charity working with older people - launch an innovative program to fight chronic loneliness among the elderly population. Many elderly people can go days or weeks without somebody to talk with. Age UK uses Twilio Programmable Voice to connect volunteers who want to brighten somebody’s day with elderly people who need a companion, if only for a few minutes on the phone each week. I’ve seen the video testimonials, and Age UK is really helping to lift the spirits of the lonely, and we’re proud to do our small part to help. Some long-time community members are just prolific, and Lee Martin is such a person. Lee was working with artist Dan Tyminski (‘‘Man of Constant Sorrow’’ and singing voice of George Clooney from O’ Brother!) on the launch of his album Southern Gothic. Inspired by the community feel of in-person listening parties, Lee had the idea to use Twilio Video and create online listening parties to celebrate the launch of this album. Also, in 2017, David Gouldin used Twilio to help potty train his three year old son by combining an Amazon Internet button and Twilio Programmable SMS. When his son needs to use the bathroom in the middle of the night, he hits the button which sends a text to this clever father, who can (sleepily, for sure) help his son to the bathroom. Can’t say we envisioned that when we built Programmable SMS! From cheering up the elderly to preventing a midnight ‘‘accident’’, our community didn’t disappoint in 2017, again reinforcing the line we never fail to invoke when launching new developer products: ‘‘We can’t wait to see what you build!’’ Investors often ask me how we choose which products to build, so I thought I’d take a moment to walk through the trends we see that inform our investments. *** FAQ *** First, as companies undergo ‘‘Digital Transformation’’ and migrate their workflows and customer touchpoints from in-person to digital, their communications must migrate to digital as well. Developers are at the forefront of this transformation, and tackle the challenges that arise in migrating countless businesses to digital. Our APIs are an ideal platform to help developers realize the ideas that might otherwise have sat idle in their heads. This migration of workloads from in-person to digital, for example, drove our investment in video as a key building block of our Programmable Communications Cloud. We’ve seen this in customers like ING Bank, who now are able to fulfill the ‘‘Know Your Customer’’ banking requirement to verify a customer’s identity – over in-app mobile video instead of in-person at a branch. This alone has enabled them to expand into new markets where they don’t currently operate branches. This analog to digital conversion of every variety of business processes, and communications in particular, is a secular wave that Twilio is riding (and likely accelerating.) Most companies have barely scratched the surface of what is possible with modern communications, especially the vast majority of companies still tethered to the legacy, monolithic applications they deployed in the Client-Server era a decade ago. Our job is to help every organization become an expert in digital communications. Second, we believe that communications are becoming more plentiful, but also increasingly fragmented and harder to make sense of - which is creating big challenges for companies trying to reach their customers. In 2008, when we started Twilio, our initial innovation was making traditional voice and messaging programmable - which had never been done before. In 2013, we embarked on making our communications more mobile – by starting to introduce new channels like Programmable Video, Programmable Chat, Facebook Messenger, and more. But now in 2018, we look at the proliferation of communications we have daily and realize that it’s not more communications, but better communications that are needed. Not just as consumers, but as businesses as well. Our customers’ engagement with their users’ needs to be timely, relevant, and actionable – or else it won’t help build a meaningful relationship with the user. We’ve been seeing developers build these workflows into contact centers, and are excited to accelerate their development with Flex, Studio, Understand, and more. New tools, such as machine learning, give us the ability to help improve the effectiveness of our customers’ communications, and we expect this roadmap to bear fruit over time - although it’s still early in the evolution of these new technologies. Third, we believe that experimentation is the prerequisite to innovation. I still find it surprising when I hear about management teams at some software companies that debate furiously about which products to fund - as if one person in the room knows the answer! Given the low startup cost of software ideas and the speediness of customer feedback, it always seems like the key question is not which ones to fund but rather, how can we increase the number of experiments? Instead of deploying significant resources towards one product with an unsure reception from customers, why not try many experiments and let your customers guide your path? This belief impacts both our internal and public-facing execution. Our general philosophy about innovation is this: Nobody truly knows which products will ultimately win. If management teams knew at the onset which products were winners or losers, then of course they’d only build the winners! But that’s not how innovation works. You listen to customers and hear their problems, and then invest in answers to problems that you believe are particularly painful and widely shared among customers. As a platform, we minimize friction wherever possible to encourage more experimentation by our customers - which will ultimately lead to finding successful solutions. This belief in experimentation also drives much of our investment in internal platforms – software that enables small R&D teams at Twilio to quickly deliver new products. In fact, we probably have more internal platform investments than most companies of our size and I believe it serves us well as an innovation-focused company. In 2017, we shipped code to production more than 50 times per day on average, while achieving 99.999% availability across our APIs. We introduced new customer- facing products or major features every two business days on average. We can achieve this ‘‘agility with resiliency’’ because our internal platform investments - made over 10 years - make it easy for small product teams to focus on customer needs and iterate quick only on ideas. Take for example Programmable Fax – a product initially built by just a few developers as an April Fools’ joke in 2017 - which now shows strong demand from both developers and enterprise buyers! *** One particularly clever question I often get is: What do most people not understand about Twilio? At Twilio, we think about the advantages of the platform business model in ways that most businesses and investors do not. This thought process leads us to make decisions that people may not immediately understand, but we believe in the fullness of time, give us a unique advantage. First, starting with APIs gives us exposure to customer problems long before other companies see them. In most software companies, they build an application to solve a particular problem for a known buyer - HR, sales, IT, etc. - but this approach assumes that you know the problem you’re going to solve ahead of time. However with APIs, you see customers solving the problems that no app has solved, or solved effectively. Thus developers start solving those problems with our APIs - and when we ask the right questions - we get to the heart of the business challenge they’re seeing. This dynamic gives Twilio a front row seat to business problems that still need solving, and informs our roadmap of where to go next. In the past year, unmet needs in the contact center market resulted in our introduction of Flex - the world’s first fully programmable contact center application platform. Companies have long wanted more from their contact centers than fixed-feature applications would permit - and thus, they turned to Twilio’s APIs to remove those limitations and finally unlock their roadmap. We’ve helped many companies reinvent their contact centers over the years, and our early learnings informed the creation of our TaskRouter product in 2015. With TaskRouter, even more companies could adopt Twilio for contact center reinvention, and we kept listening to the things that brought them to our doorstep from legacy vendors, illuminating even more brightly the opportunity ahead of us. Visibility into this unmet customer need led us to build Flex, which provides complete omni-channel capabilities, built-in intelligence and massive scale, all without sacrificing the flexibility of a platform. In addition to unique insights, the platform business model allows us to tap into an efficient revenue acquisition model. With a platform, we empower software developers to get started prototyping solutions with minimal friction. In the early days of Twilio, it was clear this model worked well for fast growing technology startups. But now, we see this model works equally well inside some of the largest enterprises (and government agencies!) in the world, and companies across nearly every traditional vertical. In each of the new customers I noted above - Morgan Stanley, the GSA, and National Debt Relief -- it was the software developers in the organizations that got the ball rolling and championed our relationship, which our sales team helped navigate through an efficient deal cycle. But here’s the magic: A fundamentally more efficient go-to-market strategy allows us to spend more on technology innovation - listening to customers and building ever more sophisticated APIs and software - which helps us further serve our customers and accelerate our lead. We’ve spent well over a quarter of a billion dollars on R&D in the company’s history - far more than any of our direct competitors both in total dollars and as a percentage of revenue - and the results show tangible benefits for our customers in terms of features and functionality as well as reliability, resiliency, and global reach. The investment in R&D - especially great APIs and developer experience - is an economic flywheel. It’s not just our go-to-market that benefits - but also our expansion rate once we win over a customer. Our usage-based revenue model - which allows a developer to get started for pennies, but then scales with the success of their application - does a fantastic job of aligning our success with our customers’ success. Last, but possibly most interesting, is the effect of compounding interest in our business. Students of the financial markets often refer to compounding interest as the eighth wonder of the world. The magic of compounding interest is that you benefit from growth without having to put in more capital. We often say that our usage-based revenue model not only aligns us nicely with our customers, but also constitutes a form of compounding interest. In most B2B companies, revenue grows more like simple interest - a brute force function of principal invested - after you ‘‘win’’ a deal, the only way to grow revenue is to sell more product to the customer, which requires another expensive sales cycle (at best!) or building a whole other product to sell them! At Twilio, our revenue grows as our customer’s usage grows - so as a customer’s application grows from prototype, to beta, to GA to global rollout, we grow our usage-based revenue with relatively little work from us or from our customer. When a customer realizes they can use our products to solve yet another problem, our usage-based revenue grows again. And as their business grows and gains customers, again our usage-based revenue grows. These revenue growth scenarios often play out with little to no incremental investment by Twilio. And while we also have a sales team to ensure customer success, cross sell and upsell, those efforts are often not strictly needed to grow our same store sales - which is a powerful growth mechanism. Naturally, I often field the question of when we’ll reach profitability. *** In 2018 we plan to reach Non-GAAP operating breakeven by the third quarter. Instilling the discipline to reach profitability while growing rapidly is challenging work, but it forces prioritization and urgency - Good Things(cid:2). While profitability is an important milestone, our number one priority remains revenue growth as we are in the first stages of a long game to transform one of the largest markets, communications, with the power of software. We intend to continue our principled but aggressive level of investment, in R&D to build products that enable the future of communications, in go-to-market to onboard more developers, enterprises and partners, and in G&A to support this growth. *** 2018: Kicking off the next 10 years *** There’s a certain magic to communications - the idea that you can instantly talk to somebody across the planet is quotidian, sure, but it’s also a modern miracle. Similarly, there’s a magic to Twilio that stems from the nature of our product. It’s magical that a developer can write a few lines of code, and programmatically address every phone on the planet. There’s magic in having your code jump off the page and make your phone ring. There’s also magic in the people who make this happen - Twilions. We care deeply about our customers, and helping make their ideas a reality using our platform. For example, our developer evangelism team has long internalized their mission to serve - not sell - our developer community. We also care about each other, and have built a culture based on respect, empowerment, and small team cohesiveness. Twilions are here to bring out the best in each other, and help each other do the best work of our lives. I’m eternally grateful for the privilege to serve this amazing group of people, going into 2018, now over 1,000 strong. Our core businesses - Programmable Voice and Programmable SMS - continue to grow nicely, and we believe will be the engine of growth for years to come. However, new channels like Voice over IP, Chat, Video, Facebook Messenger, WhatsApp, Apple Business Chat, RCS Business Messaging, Alexa, and countless others are emerging at a rapid pace. We expect 2018 to be yet another year of rapid evolution in these channels. And now, on top of all these channels, machine learning and artificial intelligence are bringing about a new frontier of intelligence and automation. Agents and bots are the frequently referenced applications, but we think those use cases only scratch the surface of what’s possible - and every year is bringing rapid advancements in these emerging technologies. Between the proliferation of channels, the impact of artificial intelligence, and the migration of these workloads to the cloud - the transformation of communications from hardware to software remains in its earliest stages in 2018. Our investments and priorities in 2018 are squarely aimed at helping our customers make sense of this evolving landscape. Our top priorities are to continue our evolution into a strategic software platform for customer engagement, while expanding our position as developers’ first choice for all communications. All Twilions are aligned around these priorities. Accomplishing these goals requires a collective effort from all Twilions - from the R&D teams driving innovation, to the go-to-market teams engaging with customers and prospects, to the G&A teams supporting the rest of the organization’s growth. We’ve added significantly to the team in recent periods - highlighted by the addition of two senior executives in 2018. Ron Huddleston has joined us as Chief Partners Officer - where he will be responsible for unifying our partner experiences for Twilio across Solution Partners, SIs, VARs, and Resellers - and growing our overall partner ecosystem. In addition, Sara Varni has joined us as Chief Marketing Officer to scale our marketing efforts around the world. Building out our partner ecosystem and expanding our awareness in the enterprise world are key components of our future growth - so we’re thrilled to add them both to the team. In our 10th year, I’m reminded of the old axiom that we overestimate what we can build in a year, and underestimate what we can build in 10 years. It’s still amazing to me to think that a company that accidentally launched with a Rick Roll now powers critical customer communications for tens of thousands of companies, ranging from startups and tech powerhouses to Fortune 100 companies around the world. As I look forward, I’m thrilled to be at the helm of a company that’s the market leader in a category we created - the cloud communications platform - in the early days of a massive opportunity. While the last 10 years have been amazing, I’m even more excited about the next 10 years. Communications remains anchored in the past due to legacy technologies - siloed and broken experiences for most companies. We have just scratched the surface of this opportunity to both help modernize existing communications cycles, and to invent new cycles that were not possible with legacy technologies. We’re honored that a growing list of companies of all shapes and sizes have placed their trust in Twilio - but there are many more to bring into the fold. I can’t wait to see what they build in the next 10 years! Onward, Jeff Lawson 3NOV201506205826 TWILIO INC. 375 BEALE STREET, SUITE 300 SAN FRANCISCO, CALIFORNIA 94105 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To Be Held at 9:00 a.m. Pacific Time on Thursday, June 14, 2018 Dear Stockholders of Twilio Inc.: We cordially invite you to attend the 2018 annual meeting of stockholders (the ‘‘Annual Meeting’’) of Twilio Inc., a Delaware corporation, which will be held on Thursday, June 14, 2018 at 9:00 a.m. Pacific Time at Three Embarcadero Center, 27th Floor, San Francisco, CA 94111, for the following purposes, as more fully described in the accompanying proxy statement: 1. To elect three Class II directors to serve until the 2021 annual meeting of stockholders and until their successors are duly elected and qualified; 2. To ratify the appointment of KPMG LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2018; 3. To conduct a non-binding advisory vote to approve the compensation of our named executive officers; 4. To conduct a non-binding advisory vote on the frequency of future non-binding advisory votes to approve the compensation of our named executive officers; and 5. To transact such other business as may properly come before the Annual Meeting or any adjournments or postponements thereof. Our board of directors has fixed the close of business on April 16, 2018 as the record date for the Annual Meeting. Only stockholders of record on April 16, 2018 are entitled to notice of and to vote at the Annual Meeting. Further information regarding voting rights and the matters to be voted upon is presented in the accompanying proxy statement. On or about April 27, 2018, we expect to mail to our stockholders a Notice of Internet Availability of Proxy Materials (the ‘‘Notice’’) containing instructions on how to access our proxy statement for our 2018 Annual Meeting of Stockholders (the ‘‘Proxy Statement’’) and our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the ‘‘Annual Report’’). The Proxy Statement and the Annual Report can be accessed directly at the following Internet address: http://materials.proxyvote.com/90138F. All you have to do is enter the control number located on your proxy card. YOUR VOTE IS IMPORTANT. Whether or not you plan to attend the Annual Meeting, we urge you to submit your vote via the Internet, telephone or mail as soon as possible to ensure that your shares are represented. For additional instructions on voting by telephone or the Internet, please refer to your proxy card. Returning the proxy does not deprive you of your right to attend the Annual Meeting and to vote your shares at the Annual Meeting. We appreciate your continued support of Twilio. By order of the Board of Directors, P r o x y 19APR201717503459 Jeff Lawson Co-Founder, Chief Executive Officer and Chairperson of the Board San Francisco, California April 27, 2018 Table of Contents PROCEDURAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BOARD OF DIRECTORS AND CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . 1 8 PROPOSAL NO. 1—ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 PROPOSAL NO. 2—RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 PROPOSAL NO. 3—NON-BINDING ADVISORY VOTE TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PROPOSAL NO. 4—NON-BINDING ADVISORY VOTE ON THE FREQUENCY OF FUTURE NON-BINDING ADVISORY VOTES TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . REPORT OF THE AUDIT COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COMPENSATION DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COMPENSATION COMMITTEE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EQUITY COMPENSATION PLAN INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 23 24 25 27 27 52 53 54 58 60 APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 TWILIO INC. PROXY STATEMENT FOR 2018 ANNUAL MEETING OF STOCKHOLDERS PROCEDURAL MATTERS This proxy statement and the enclosed form of proxy are furnished in connection with the solicitation of proxies by our board of directors for use at the 2018 annual meeting of stockholders of Twilio Inc., a Delaware corporation (the ‘‘Company’’), and any postponements, adjournments or continuations thereof (the ‘‘Annual Meeting’’). The Annual Meeting will be held on Thursday, June 14, 2018 at 9:00 a.m. Pacific Time at Three Embarcadero Center, 27th Floor, San Francisco, CA 94111. The Notice of Internet Availability of Proxy Materials (the ‘‘Notice’’) containing instructions on how to access this proxy statement and our annual report is first being mailed on or about April 27, 2018 to all stockholders entitled to vote at the Annual Meeting. The information provided in the ‘‘question and answer’’ format below is for your convenience only and is merely a summary of the information contained in this proxy statement. You should read this entire proxy statement carefully. Information contained on, or that can be accessed through, our website is not intended to be incorporated by reference into this proxy statement and references to our website address in this proxy statement are inactive textual references only. P r o x y What matters am I voting on? You will be voting on: • the election of three Class II directors to serve until the 2021 annual meeting of stockholders and until their successors are duly elected and qualified; • a proposal to ratify the appointment of KPMG LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2018; • a proposal to conduct a non-binding advisory vote to approve the compensation of our named executive officers; • a proposal to conduct a non-binding advisory vote on the frequency of future non-binding advisory votes to approve the compensation of our named executive officers; and • any other business as may properly come before the Annual Meeting. How does the board of directors recommend I vote on these proposals? Our board of directors recommends a vote: • ‘‘FOR’’ the election of Byron Deeter, Jeffrey Epstein and Jeff Lawson as Class II directors; • ‘‘FOR’’ the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2018; • ‘‘FOR’’ the approval, on a non-binding advisory basis, of the compensation of our named executive officers, as disclosed in this proxy statement; and • ‘‘FOR’’ the option of ‘‘one year’’ as the preferred frequency for future non-binding advisory votes to approve the compensation of our named executive officers. 1 Who is entitled to vote? Holders of either class of our common stock as of the close of business on April 16, 2018, the record date for the Annual Meeting, may vote at the Annual Meeting. As of the record date, there were 71,815,976 shares of our Class A common stock outstanding and there were 23,928,244 shares of our Class B common stock outstanding. Our Class A common stock and Class B common stock will vote as a single class on all matters described in this proxy statement for which your vote is being solicited. Stockholders are not permitted to cumulate votes with respect to the election of directors. Each share of Class A common stock is entitled to one vote on each proposal and each share of Class B common stock is entitled to 10 votes on each proposal. Our Class A common stock and Class B common stock are collectively referred to in this proxy statement as our ‘‘common stock.’’ Registered Stockholders. If shares of our common stock are registered directly in your name with our transfer agent, you are considered the stockholder of record with respect to those shares, and the Notice was provided to you directly by us. As the stockholder of record, you have the right to grant your voting proxy directly to the individuals listed on the proxy card or to vote live at the Annual Meeting. Throughout this proxy statement, we refer to these registered stockholders as ‘‘stockholders of record.’’ Street Name Stockholders. If shares of our common stock are held on your behalf in a brokerage account or by a bank or other nominee, you are considered to be the beneficial owner of shares that are held in ‘‘street name,’’ and the Notice was forwarded to you by your broker or nominee, who is considered the stockholder of record with respect to those shares. As the beneficial owner, you have the right to direct your broker, bank or other nominee as to how to vote your shares. Beneficial owners are also invited to attend the Annual Meeting. However, since a beneficial owner is not the stockholder of record, you may not vote your shares of our common stock live at the Annual Meeting unless you follow your broker’s procedures for obtaining a legal proxy. If you request a printed copy of our proxy materials by mail, your broker, bank or other nominee will provide a voting instruction form for you to use. Throughout this proxy statement, we refer to stockholders who hold their shares through a broker, bank or other nominee as ‘‘street name stockholders.’’ How many votes are needed for approval of each proposal? • Proposal No. 1: The election of directors requires a plurality of the voting power of the shares of our common stock present in person or by proxy at the Annual Meeting and entitled to vote thereon to be approved. ‘‘Plurality’’ means that the nominees who receive the largest number of votes cast ‘‘For’’ such nominees are elected as directors. As a result, any shares not voted ‘‘For’’ a particular nominee (whether as a result of stockholder abstention or a broker non-vote) will not be counted in such nominee’s favor and will have no effect on the outcome of the election. You may vote ‘‘For’’ or ‘‘Withhold’’ on each of the nominees for election as a director. • Proposal No. 2: The ratification of the appointment of KPMG LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2018 requires the affirmative vote of a majority of the voting power of the shares of our common stock present in person or by proxy at the Annual Meeting and entitled to vote thereon to be approved. Abstentions are considered shares present and entitled to vote on this proposal, and thus, will have the same effect as a vote ‘‘Against’’ this proposal. Broker non-votes will have no effect on the outcome of this proposal. • Proposal No. 3: A majority of the voting power of the shares of our common stock present in person or by proxy at the Annual Meeting and entitled to vote thereon is required to approve the compensation of our named executive officers. Since this proposal is an advisory vote, the result will not be binding on our board of directors, our compensation committee, or the Company. The board of directors and our compensation committee will consider the outcome of 2 the vote when determining the compensation of our named executive officers. Abstentions are considered shares present and entitled to vote on this proposal, and thus, will have the same effect as a vote ‘‘Against’’ this proposal. Broker non-votes will have no effect on the outcome of this proposal. • Proposal No. 4: The frequency receiving the highest number of votes from the voting power of shares of our common stock present in person or by proxy and entitled to vote will be considered the frequency preferred by the stockholders. Since this proposal is an advisory vote, the result will not be binding on our board of directors, our compensation committee, or the Company. The board of directors and our compensation committee will consider the outcome of the vote when determining how often we should submit to stockholders future advisory votes to approve the compensation of our named executive officers. Broker non-votes and abstentions will have no effect on the outcome of this proposal. What is a quorum? A quorum is the minimum number of shares required to be present at the Annual Meeting to properly hold an annual meeting of stockholders and conduct business under our amended and restated bylaws and Delaware law. The presence, in person or by proxy, of the holders of a majority of the voting power of all issued and outstanding shares of our common stock entitled to vote at the Annual Meeting will constitute a quorum at the Annual Meeting. Abstentions, withheld votes and broker non-votes are counted as shares present and entitled to vote for purposes of determining a quorum. How do I vote? If you are a stockholder of record, there are four ways to vote: • by Internet at www.proxyvote.com, 24 hours a day, seven days a week, until 11:59 p.m. Eastern Time on June 13, 2018 (have your Notice or proxy card in hand when you visit the website); • by toll-free telephone at 1-800-690-6903, until 11:59 p.m. Eastern Time on June 13, 2018 (have your Notice or proxy card in hand when you call); • by completing and mailing your proxy card (if you received printed proxy materials); or • by written ballot at the Annual Meeting. If you plan to attend the Annual Meeting, we recommend that you also vote by proxy so that your vote will be counted if you later decide not to attend the Annual Meeting. If you are a street name stockholder, you will receive voting instructions from your broker, bank or other nominee. You must follow the voting instructions provided by your broker, bank or other nominee in order to direct your broker, bank or other nominee on how to vote your shares. Street name stockholders should generally be able to vote by returning a voting instruction form, or by telephone or on the Internet. However, the availability of telephone and Internet voting will depend on the voting process of your broker, bank or other nominee. As discussed above, if you are a street name stockholder, you may not vote your shares in person at the Annual Meeting unless you obtain a legal proxy from your broker, bank or other nominee. Can I change my vote? Yes. If you are a stockholder of record, you can change your vote or revoke your proxy any time before the Annual Meeting by: • entering a new vote by Internet or by telephone; • completing and returning a later-dated proxy card; 3 P r o x y • notifying the Corporate Secretary of Twilio Inc., in writing, at Twilio Inc., 375 Beale Street, Suite 300, San Francisco, California 94105; or • attending and voting at the Annual Meeting (although attendance at the Annual Meeting will not, by itself, revoke a proxy). If you are a street name stockholder, your broker, bank or other nominee can provide you with instructions on how to change your vote. What do I need to do to attend the Annual Meeting in person? If you plan to attend the meeting, you must be a holder of Company shares as of the record date of April 16, 2018. On the day of the meeting, each stockholder will be required to present the following: • valid government photo identification, such as a driver’s license or passport; and • street name stockholders holding their shares through a broker, bank, trustee, or other nominee will need to bring proof of beneficial ownership as of April 16, 2018, the record date, such as their most recent account statement reflecting their stock ownership prior to April 16, 2018, a copy of the voting instruction card provided by their broker, bank, trustee, or other nominee, or similar evidence of ownership. Seating will begin at 8:00 a.m. and the meeting will begin at 9:00 a.m.. Please note that seating is limited and you will be permitted entry on a first-come, first-served basis. Use of cameras, recording devices, computers and other personal electronic devices will not be permitted at the Annual Meeting, as all photography and video are prohibited at the Annual Meeting. Allow ample time for check-in. Parking is limited. Please consider using public transportation. For security reasons, large bags and packages will not be allowed at the Annual Meeting. Persons may be subject to search. What is the effect of giving a proxy? Proxies are solicited by and on behalf of our board of directors. Jeff Lawson, Lee Kirkpatrick and Karyn Smith have been designated as proxy holders by our board of directors. When proxies are properly dated, executed and returned, the shares represented by such proxies will be voted at the Annual Meeting in accordance with the instructions of the stockholder. If no specific instructions are given, however, the shares will be voted in accordance with the recommendations of our board of directors as described above. If any matters not described in this proxy statement are properly presented at the Annual Meeting, the proxy holders will use their own judgment to determine how to vote the shares. If the Annual Meeting is adjourned, the proxy holders can vote the shares on the new Annual Meeting date as well, unless you have properly revoked your proxy instructions, as described above. Why did I receive a Notice of Internet Availability of Proxy Materials instead of a full set of proxy materials? In accordance with the rules of the Securities and Exchange Commission (‘‘SEC’’), we have elected to furnish our proxy materials, including this proxy statement and our annual report, primarily via the Internet. The Notice containing instructions on how to access our proxy materials is first being mailed on or about April 27, 2018 to all stockholders entitled to vote at the Annual Meeting. Stockholders may request to receive all future proxy materials in printed form by mail or electronically by e-mail by following the instructions contained in the Notice. We encourage stockholders to take advantage of the 4 availability of our proxy materials on the Internet to help reduce the environmental impact and cost of our annual meetings of stockholders. How are proxies solicited for the Annual Meeting? Our board of directors is soliciting proxies for use at the Annual Meeting. All expenses associated with this solicitation will be borne by us. We will reimburse brokers or other nominees for reasonable expenses that they incur in sending our proxy materials to you if a broker, bank or other nominee holds shares of our common stock on your behalf. In addition, our directors and employees may also solicit proxies in person, by telephone or by other means of communication. Our directors and employees will not be paid any additional compensation for soliciting proxies. How may my brokerage firm or other intermediary vote my shares if I fail to provide timely directions? Brokerage firms and other intermediaries holding shares of our common stock in street name for their customers are generally required to vote such shares in the manner directed by their customers. In the absence of timely directions, your broker will have discretion to vote your shares on our sole ‘‘routine’’ matter: the proposal to ratify the appointment of KPMG LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2018. Your broker will not have discretion to vote on any other proposals, which are ‘‘non-routine’’ matters, absent direction from you. Where can I find the voting results of the Annual Meeting? We will announce preliminary voting results at the Annual Meeting. We will also disclose voting results on a Current Report on Form 8-K that we will file with the SEC within four business days after the Annual Meeting. If final voting results are not available to us in time to file a Current Report on Form 8-K within four business days after the Annual Meeting, we will file a Current Report on Form 8-K to publish preliminary results and will provide the final results in an amendment to the Current Report on Form 8-K as soon as they become available. P r o x y I share an address with another stockholder, and we received only one paper copy of the proxy materials. How may I obtain an additional copy of the proxy materials? We have adopted a procedure called ‘‘householding,’’ which the SEC has approved. Under this procedure, we deliver a single copy of the Notice and, if applicable, our proxy materials, to multiple stockholders who share the same address, unless we have received contrary instructions from one or more of such stockholders. This procedure reduces our printing costs, mailing costs and fees. Stockholders who participate in householding will continue to be able to access and receive separate proxy cards. Upon written or oral request, we will deliver promptly a separate copy of the Notice and, if applicable, our proxy materials, to any stockholder at a shared address to which we delivered a single copy of any of these materials. To receive a separate copy, or, if a stockholder is receiving multiple copies, to request that we only send a single copy of the Notice and, if applicable, our proxy materials, such stockholder may contact us at (415) 801-3799 or: Twilio Inc. Attention: Investor Relations 375 Beale Street, Suite 300 San Francisco, California 94105 Street name stockholders may contact their broker, bank or other nominee to request information about householding. 5 What is the deadline to propose actions for consideration at next year’s annual meeting of stockholders or to nominate individuals to serve as directors? Stockholder Proposals Stockholders may present proper proposals for inclusion in our proxy statement and for consideration at next year’s annual meeting of stockholders by submitting their proposals in writing to our Corporate Secretary in a timely manner. For a stockholder proposal to be considered for inclusion in our proxy statement for the 2019 annual meeting of stockholders, our Corporate Secretary must receive the written proposal at our principal executive offices not later than December 28, 2018. In addition, stockholder proposals must comply with the requirements of Rule 14a-8 regarding the inclusion of stockholder proposals in company-sponsored proxy materials. Stockholder proposals should be addressed to: Twilio Inc. Attention: Corporate Secretary 375 Beale Street, Suite 300 San Francisco, California 94105 Our amended and restated bylaws also establish an advance notice procedure for stockholders who wish to present a proposal before an annual meeting of stockholders but do not intend for the proposal to be included in our proxy statement. Our amended and restated bylaws provide that the only business that may be conducted at an annual meeting of stockholders is business that is (i) specified in our proxy materials with respect to such annual meeting, (ii) otherwise properly brought before such annual meeting by or at the direction of our board of directors or (iii) properly brought before such meeting by a stockholder of record entitled to vote at such annual meeting who has delivered timely written notice to our Corporate Secretary, which notice must contain the information specified in our amended and restated bylaws. To be timely for the 2019 annual meeting of stockholders, our Corporate Secretary must receive the written notice at our principal executive offices: • not earlier than the close of business on February 11, 2019; and • not later than the close of business on March 13, 2019. In the event that we hold the 2019 annual meeting of stockholders more than 30 days before or more than 60 days after the one-year anniversary of the Annual Meeting, then, for notice by the stockholder to be timely, it must be received by the secretary not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting, or the tenth day following the day on which public announcement of the date of such annual meeting is first made. If a stockholder who has notified us of his, her or its intention to present a proposal at an annual meeting of stockholders does not appear to present his, her or its proposal at such annual meeting, we are not required to present the proposal for a vote at such annual meeting. Nomination of Director Candidates Holders of our common stock may propose director candidates for consideration by our nominating and corporate governance committee. Any such recommendations should include the nominee’s name and qualifications for membership on our board of directors and should be directed to our General Counsel or legal department at the address set forth above. For additional information regarding stockholder recommendations for director candidates, see the section titled ‘‘Board of Directors and Corporate Governance—Stockholder Recommendations and Nominations to the Board of Directors.’’ 6 In addition, our amended and restated bylaws permit stockholders to nominate directors for election at an annual meeting of stockholders. To nominate a director, the stockholder must provide the information required by our amended and restated bylaws. In addition, the stockholder must give timely notice to our Corporate Secretary in accordance with our amended and restated bylaws, which, in general, require that the notice be received by our Corporate Secretary within the time periods described above under the section titled ‘‘Stockholder Proposals’’ for stockholder proposals that are not intended to be included in a proxy statement. Availability of Bylaws A copy of our amended and restated bylaws is available via the SEC’s website at http://www.sec.gov. You may also contact our Corporate Secretary at the address set forth above for a copy of the relevant bylaw provisions regarding the requirements for making stockholder proposals and nominating director candidates. P r o x y 7 BOARD OF DIRECTORS AND CORPORATE GOVERNANCE Our business and affairs are managed under the direction of our board of directors. Our board of directors consists of seven directors, all of whom, other than Messrs. Lawson and Deeter, qualify as ‘‘independent’’ under the listing standards of The New York Stock Exchange (the ‘‘NYSE Listing Standards’’). Our board of directors is divided into three staggered classes of directors. At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the class whose term is then expiring. The following table sets forth the names, ages as of March 31, 2018, and certain other information for each of the members of our board of directors with terms expiring at the Annual Meeting (who are also nominees for election as a director at the Annual Meeting) and for each of the continuing members of our board of directors: Class Age Position Director Since Current Term Expires Expiration of Term For Which Nominated Directors with Terms Expiring at the Annual Meeting/ Nominees Jeff Lawson . . . . . . . . . . . . . Byron Deeter . . . . . . . . . . . Jeffrey Epstein(2) . . . . . . . . . Continuing Directors Richard Dalzell(1)(4) . . . . . . . Elena Donio(3) . . . . . . . . . . . James McGeever(2)(3)(4) . . . . . Erika Rottenberg(1)(2)(3) . . . . . II II II I III III I 40 Co-Founder, Chief Executive Officer and Chairperson 2008 2018 2021 43 Director 61 Director 61 Director 48 Director 51 Director 55 Director 2010 2017 2014 2016 2012 2016 2018 2018 2020 2019 2019 2020 2021 2021 — — — — (1) Member of the nominating and corporate governance committee (2) Member of the audit committee (3) Member of the compensation committee (4) Effective May 31, 2018, Mr. McGeever will resign from our audit committee and our compensation committee and Mr. Dalzell has been appointed to fill such vacancies. Nominees for Director Jeff Lawson. See the section titled ‘‘Executive Officers’’ for Mr. Lawson’s biographical information. Byron Deeter. Mr. Deeter has served as a member of our board of directors since November 2010. Since 2005, Mr. Deeter has served as a partner of Bessemer Venture Partners, a venture capital firm. From 2004 to 2005, Mr. Deeter served as a director at International Business Machines Corporation, or IBM, a technology and consulting company. From 2000 to 2004, Mr. Deeter served in several roles at Trigo Technologies, Inc., a product information management company, which was acquired by IBM in 2004, including co-founder, President, Chief Executive Officer and Vice President of Business Development. From 1998 to 2000, Mr. Deeter served as an Associate at TA Associates, a private equity firm. From 1996 to 1998, Mr. Deeter served as an Analyst at McKinsey & Company, a business consulting firm. Mr. Deeter previously served on the board of directors of Cornerstone OnDemand, Inc., a talent management software company and Instructure, Inc., an educational 8 technology company. Mr. Deeter holds a B.A. in Political Economy from the University of California, Berkeley. Mr. Deeter was selected to serve on our board of directors because of his experience in the venture capital industry and as a director of publicly-held and privately-held technology companies. Jeffrey Epstein. Mr. Epstein has served as a member of our board of directors since July 2017. Mr. Epstein is an Operating Partner at Bessemer Venture Partners, a venture capital firm, which he joined in November 2011. From August 2011 to May 2014, he also served as a Senior Advisor at Oak Hill Capital Partners, a private equity firm. From September 2008 to April 2011, Mr. Epstein was Executive Vice President and Chief Financial Officer of Oracle Corporation, an enterprise software company. Since April 2003, Mr. Epstein has served as a director of The Priceline Group, Inc., a leading provider of online travel, and serves as a member of its Audit Committee and Compensation Committee. Since April 2012, Mr. Epstein has served as a member of the Board of Directors of Shutterstock, Inc., a global provider of licensed imagery, and serves as Chairman of its Audit Committee and as a member of its Nominating and Corporate Governance Committee. Since January 2013, Mr. Epstein has served as a member of the Board of Directors of Global Eagle Entertainment Inc., a provider of in-flight video, Internet and other content to airlines and their passengers, and serves as a member of its Corporate Governance and Nominating Committee. Mr. Epstein serves as a member of the Board of Directors of Kaiser Permanente, a leading U.S. not-for-profit health care provider and health plan. Mr. Epstein holds a B.A. from Yale University and an M.B.A. from Stanford University. Mr. Epstein was selected to serve on our board of directors because of his experience as an executive and director of technology companies. Continuing Directors Richard Dalzell. Mr. Dalzell has served as a member of our board of directors since March 2014. From 1997 to 2007, Mr. Dalzell served in several roles at Amazon.com, Inc., an e-commerce and cloud computing company, including as Senior Vice President of Worldwide Architecture and Platform Software and Chief Information Officer. From 1990 to 1997, Mr. Dalzell served in several roles at Wal-Mart Stores, Inc., a discount retailer, including as Vice President of the Information Systems Division. Mr. Dalzell currently serves on the board of directors of Intuit Inc., a software company. Mr. Dalzell previously served on the board of directors of AOL Inc. Mr. Dalzell holds a B.S. in Engineering from the United States Military Academy at West Point. Mr. Dalzell was selected to serve on our board of directors because of his experience as an executive and director of technology companies. Elena Donio. Ms. Donio has served as a member of our board of directors since February 2016. Since 2016, Ms. Donio has served as Chief Executive Officer at Axiom Global, a leading provider of tech-enabled legal services. From 1998 to 2016, Ms. Donio served in several roles, including as President, Executive Vice President and General Manager of Worldwide Small and Mid-Sized Businesses, at Concur Technologies, Inc., a business travel and expense management software company, which was acquired by SAP SE in 2014. From 1995 to 1997, Ms. Donio served as Senior Manager at Deloitte Consulting LLP, a professional services firm. From 1992 to 1995, Ms. Donio served as Senior Consultant at Andersen Consulting LLP, a business consulting firm. Ms. Donio holds a B.A. in Economics from the University of California, San Diego. Ms. Donio was selected to serve on our board of directors because of her experience as a senior executive of a technology company and her industry experience. 9 P r o x y James McGeever. Mr. McGeever has served as a member of our board of directors since June 2012. Since 2016, Mr. McGeever has served as Executive Vice President at Oracle NetSuite Global Business Unit. From 2000 to 2016, Mr. McGeever served in several roles, including Chief Financial Officer, Chief Operating Officer and President, at NetSuite Inc., a software company which was acquired by Oracle Corporation in 2016. From 1998 to 2000, Mr. McGeever served as Controller for Clontech Laboratories, Inc., a biotechnology company, which was acquired by Becton, Dickinson and Company in 1999. From 1994 to 1998, Mr. McGeever served as Corporate Controller for Photon Dynamics, Inc., a capital equipment maker. Mr. McGeever holds a B.Sc. from the London School of Economics. Mr. McGeever was selected to serve on our board of directors because of his operating and management experience with technology companies, including in the areas of finance and accounting. Erika Rottenberg. Ms. Rottenberg has served as a member of our board of directors since June 2016. From 2008 to 2014, Ms. Rottenberg served as Vice President, General Counsel and Secretary at LinkedIn Corporation, a professional networking company. From 2004 to 2008, Ms. Rottenberg served as Senior Vice President, General Counsel and Secretary at SumTotal Systems, Inc., a talent management enterprise software company. From 1996 to 2002, Ms. Rottenberg served in several roles at Creative Labs, Inc., a computer peripheral and digital entertainment product company, including as Vice President, Strategic Development and General Counsel. From 1993 to 1996, Ms. Rottenberg served as an attorney at Cooley LLP, a law firm. Ms. Rottenberg currently serves on the board of directors of Wix.com Ltd., a cloud-based web development platform, Girl Scouts USA, the Silicon Valley Law Foundation, and the Center for Democracy and Technology. Ms. Rottenberg holds a B.S. in Special and Elementary Education from the State University of New York at Geneseo and a J.D. from the University of California, Berkeley, Boalt Hall School of Law. Ms. Rottenberg was selected to serve on our board of directors because of her experience as a senior executive of technology companies and as a director of publicly-held technology companies. Director Independence Our Class A common stock is listed on The New York Stock Exchange. Under the NYSE Listing Standards, independent directors must comprise a majority of a listed company’s board of directors. In addition, the NYSE Listing Standards require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent. Under the NYSE Listing Standards, a director will only qualify as an ‘‘independent director’’ if, in the opinion of that listed company’s board of directors, that director does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Audit committee members must also satisfy the additional independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), and the NYSE Listing Standards. Compensation committee members must also satisfy the additional independence criteria set forth in Rule 10C-1 under the Exchange Act and the NYSE Listing Standards. Our board of directors has undertaken a review of the independence of each director. Based on information provided by each director concerning his or her background, employment and affiliations, our board of directors has determined that Messrs. Dalzell, Epstein, and McGeever and Mses. Donio and Rottenberg do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is ‘‘independent’’ as that term is defined under the NYSE Listing Standards. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with our Company and all other facts and circumstances our board of 10 directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director, and the transactions involving them described in the section titled ‘‘Certain Relationships and Related Party Transactions.’’ Board Leadership Structure and Role of Our Lead Independent Director Mr. Lawson currently serves as both the Chairperson of our board of directors and as our Chief Executive Officer. Our non-management directors bring experience, oversight and expertise from outside of our Company, while Mr. Lawson brings Company-specific experience and expertise. As our co-founder, Mr. Lawson is best positioned to identify strategic priorities, lead critical discussion and execute our business plans. Since Mr. Lawson is the Chairperson of our board of directors and is not an ‘‘independent’’ director pursuant to the NYSE Listing Standards, in December 2017, we appointed Mr. Jeffrey Epstein to serve as our lead independent director. Mr. Epstein serves as a liaison between our Chief Executive Officer and Chairperson and our independent directors and performs such additional duties as our board of directors may otherwise determine and delegate. In addition, our independent directors, who are the sole members of each of our board committees, provide strong independent leadership for each of these committees. Our independent directors generally meet in executive session after each meeting of the board of directors. At each such meeting, the presiding director for each executive session of our board of directors will be either (i) the lead independent director or (ii) chosen by the independent directors. We believe that the structure of our board of directors and committees of our board of directors provides effective independent oversight of management while Mr. Lawson’s combined role enables strong leadership, creates clear accountability and enhances our ability to communicate our message and strategy clearly and consistently to stockholders. Board Meetings and Committees Our board of directors may establish the authorized number of directors from time to time by resolution. Our board of directors currently consists of seven members. During our fiscal year ended December 31, 2017, our board of directors held seven meetings (including regularly scheduled and special meetings), and each director attended at least 75% of the aggregate of (i) the total number of meetings of our board of directors held during the period for which he or she had been a director and (ii) the total number of meetings held by all committees of our board of directors on which he or she served during the periods that he or she served. Although our Corporate Governance Guidelines do not have a formal policy regarding attendance by members of our board of directors at annual meetings of stockholders, we encourage, but do not require, our directors to attend. Six members of our board of directors then serving in such capacity attended our 2017 annual meeting of stockholders. Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each of the committees of our board of directors is described below. Members serve on these committees until their resignation or until as otherwise determined by our board of directors. Audit Committee Our audit committee consists of Messrs. Epstein and McGeever and Ms. Rottenberg, with Mr. Epstein serving as Chairperson. Effective May 31, 2018, Mr. McGeever will resign from our audit committee and Mr. Dalzell has been appointed to fill such vacancy. Each member of our audit committee meets the requirements for independence under the NYSE Listing Standards and SEC 11 P r o x y rules. Each member of our audit committee also meets the financial literacy and sophistication requirements of the NYSE Listing Standards. In addition, our board of directors has determined that Messrs. Epstein and McGeever are each an audit committee financial expert within the meaning of Item 407(d) of Regulation S-K under the Securities Act of 1933, as amended (the ‘‘Securities Act’’). Our audit committee, among other things: • selects a qualified firm to serve as the independent registered public accounting firm to audit our financial statements; • helps to ensure the independence and performance of the independent registered public accounting firm; • discusses the scope and results of the audit with the independent registered public accounting firm, and reviews, with management and the independent registered public accounting firm, our interim and year-end results of operations; • develops procedures for employees to submit concerns anonymously about questionable accounting or audit matters; • reviews our policies on risk assessment and risk management; • reviews related party transactions; and • approves or, as required, pre-approves, all audit and all permissible non-audit services, other than de minimis non-audit services, to be performed by the independent registered public accounting firm. Our audit committee operates under a written charter that satisfies the applicable rules and regulations of the SEC and the NYSE Listing Standards. A copy of the charter of our audit committee is available on our website at https://investors.twilio.com/. Our audit committee held eight meetings during fiscal year 2017. Compensation Committee Our compensation committee consists of Mses. Donio and Rottenberg and Mr. McGeever, with Ms. Donio serving as Chairperson. Effective May 31, 2018, Mr. McGeever will resign from our compensation committee and Mr. Dalzell has been appointed to fill such vacancy. Each member of our compensation committee meets the requirements for independence under the NYSE Listing Standards and SEC rules. Each member of our compensation committee is also a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Exchange Act, or Rule 16b-3, and an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’). Our compensation committee, among other things: • reviews, approves and determines, or makes recommendations to our board of directors regarding, the compensation of our executive officers; • administers our stock and equity compensation plans; • reviews and approves, or makes recommendations to our board of directors, regarding incentive compensation and equity compensation plans; and • establishes and reviews general policies relating to compensation and benefits of our employees. Our compensation committee operates under a written charter that satisfies the applicable rules of the SEC and the NYSE Listing Standards. A copy of the charter of our compensation committee is available on our website https://investors.twilio.com/. Our compensation committee held four meetings during fiscal year 2017. 12 Nominating and Corporate Governance Committee Our nominating and governance committee consists of Ms. Rottenberg and Mr. Dalzell, with Ms. Rottenberg serving as Chairperson. Each member of our nominating and governance committee meets the requirements for independence under the NYSE Listing Standards and SEC rules. Our nominating and corporate governance committee, among other things: • identifies, evaluates and selects, or makes recommendations to our board of directors regarding, nominees for election to our board of directors and its committees; • considers and makes recommendations to our board of directors regarding the composition of our board of directors and its committees; • reviews and assesses the adequacy of our corporate governance guidelines and recommends any proposed changes to our board of directors; and • evaluates the performance of our board of directors and of individual directors. Our nominating and corporate governance committee operates under a written charter that satisfies the applicable NYSE Listing Standards. A copy of the charter of our nominating and corporate governance committee is available on our website at https://investors.twilio.com/. Our nominating and corporate governance committee held three meetings during fiscal year 2017. Compensation Committee Interlocks and Insider Participation None of the members of our compensation committee is or has been an officer or employee of our Company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee (or other board committee performing equivalent functions) of any entity that has one or more of its executive officers serving on our board of directors or compensation committee. See the section titled ‘‘Certain Relationships and Related Party Transactions’’ for information about related party transactions involving members of our compensation committee or their affiliates. P r o x y Identifying and Evaluating Director Nominees The board of directors has delegated to the nominating and corporate governance committee the responsibility of identifying suitable candidates for nomination to the board of directors (including candidates to fill any vacancies that may occur) and assessing their qualifications in light of the policies and principles in these corporate governance guidelines and the committee’s charter. The nominating and corporate governance committee may gather information about the candidates through interviews, detailed questionnaires, comprehensive background checks or any other means that the nominating and corporate governance committee deems to be appropriate in the evaluation process. The nominating and corporate governance committee then meets as a group to discuss and evaluate the qualities and skills of each candidate, both on an individual basis and taking into account the overall composition and needs of the board of directors. Based on the results of the evaluation process, the nominating and corporate governance committee recommends candidates for the board of director’s approval as director nominees for election to the board of directors. Minimum Qualifications Our nominating and corporate governance committee uses a variety of methods for identifying and evaluating director nominees and will consider all facts and circumstances that it deems appropriate or advisable. In its identification and evaluation of director candidates, our nominating and corporate governance committee will consider the current size and composition of our board of directors and the needs of our board of directors and the respective committees of our board of directors. Some of the 13 qualifications that our nominating and corporate governance committee considers include, without limitation, issues of character, ethics, integrity, judgment, diversity of experience, independence, skills, education, expertise, business acumen, length of service, understanding of our business and industry, potential conflicts of interest and other commitments. Nominees must also have proven achievement and competence in their field, the ability to offer advice and guidance to our management team, the ability to make significant contributions to our success, and an understanding of the fiduciary responsibilities that are required of a director. Director candidates must have sufficient time available in the judgment of our nominating and corporate governance committee to perform all board of director and committee responsibilities. Members of our board of directors are expected to prepare for, attend, and participate in all board of director and applicable committee meetings. Other than the foregoing, there are no stated minimum criteria for director nominees, although our nominating and corporate governance committee may also consider such other factors as it may deem, from time to time, are in our and our stockholders’ best interests. Although our board of directors does not maintain a specific policy with respect to board diversity, our board of directors believes that our board of directors should be a diverse body, and our nominating and corporate governance committee considers a broad range of backgrounds and experiences. In making determinations regarding nominations of directors, our nominating and corporate governance committee may take into account the benefits of diverse viewpoints. Our nominating and corporate governance committee also considers these and other factors as it oversees the annual board of directors and committee evaluations. After completing its review and evaluation of director candidates, our nominating and corporate governance committee recommends to our full board of directors the director nominees for selection. Stockholder Recommendations and Nominations to the Board of Directors Stockholders may submit recommendations for director candidates to the nominating and corporate governance committee by sending the individual’s name and qualifications to our General Counsel at Twilio Inc., 375 Beale Street, Suite 300, San Francisco, CA 94105, who will forward all recommendations to the nominating and corporate governance committee. The nominating and corporate governance committee will evaluate any candidates recommended by stockholders against the same criteria and pursuant to the same policies and procedures applicable to the evaluation of candidates proposed by directors or management. Stockholder and Other Interested Party Communications The board of directors provides to every stockholder and any other interested parties the ability to communicate with the board of directors, as a whole, and with individual directors on the board of directors through an established process for stockholder communication. For a stockholder communication directed to the board of directors as a whole, stockholders and other interested parties may send such communication to our General Counsel via U.S. Mail or Expedited Delivery Service to: Twilio Inc., 375 Beale Street, Suite 300, San Francisco, CA 94105, Attn: Board of Directors c/o General Counsel. For a stockholder or other interested party communication directed to an individual director in his or her capacity as a member of the board of directors, stockholders and other interested parties may send such communication to the attention of the individual director via U.S. Mail or Expedited Delivery Service to: Twilio Inc., 375 Beale Street, Suite 300, San Francisco, CA 94105, Attn: [Name of Individual Director]. Our General Counsel, in consultation with appropriate members of our board of directors as necessary, will review all incoming communications and, if appropriate, all such communications will be 14 forwarded to the appropriate member or members of our board of directors, or if none is specified, to the Chairperson of our board of directors. Corporate Governance Guidelines and Code of Business Conduct and Ethics Our board of directors has adopted Corporate Governance Guidelines that address items such as the qualifications and responsibilities of our directors and director candidates and corporate governance policies and standards applicable to us in general. In addition, our board of directors has adopted a code of business conduct and ethics that applies to all of our employees, officers and directors including our Chief Executive Officer, Chief Financial Officer, and other executive and senior financial officers. A copy of our Corporate Governance Guidelines and Code of Business Conduct and Ethics is available on our Internet website at https://investors.twilio.com and may also be obtained without charge by contacting our Corporate Secretary at Twilio Inc., 375 Beale Street, Suite 300, San Francisco, CA 94105. We intend to disclose any amendments to our code of business conduct and ethics, or waivers of its requirements, on our website or in filings under the Exchange Act, as required by the applicable rules and exchange requirements. During fiscal year 2017, no waivers were granted from any provision of our Code of Business Conduct and Ethics. Risk Management Risk is inherent with every business, and we face a number of risks, including strategic, financial, business and operational, legal and compliance, and reputational. We have designed and implemented processes to manage risk in our operations. Management is responsible for the day-to-day management of risks the Company faces, while our board of directors, as a whole and assisted by its committees, has responsibility for the oversight of risk management. In its risk oversight role, our board of directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are appropriate and functioning as designed. P r o x y Our board of directors believes that open communication between management and our board of directors is essential for effective risk management and oversight. Our board of directors meets with our Chief Executive Officer and other members of the senior management team at quarterly meetings of our board of directors, where, among other topics, they discuss strategy and risks facing the Company, as well as such other times as they deemed appropriate. While our board of directors is ultimately responsible for risk oversight, our board committees assist our board of directors in fulfilling its oversight responsibilities in certain areas of risk. Our audit committee assists our board of directors in fulfilling its oversight responsibilities with respect to risk management in the areas of internal control over financial reporting and disclosure controls and procedures, legal and regulatory compliance, and discusses with management and the independent auditor guidelines and policies with respect to risk assessment and risk management. Our audit committee also reviews our major financial risk exposures and the steps management has taken to monitor and control these exposures. Our audit committee also monitors certain key risks on a regular basis throughout the fiscal year, such as risk associated with internal control over financial reporting and liquidity risk. Our nominating and corporate governance committee assists our board of directors in fulfilling its oversight responsibilities with respect to the management of risk associated with board organization, membership and structure, and corporate governance. Our compensation committee assesses risks created by the incentives inherent in our compensation programs, policies and practices. Finally, our full board of directors reviews strategic and operational risk in the context of reports from the management team, receives reports on all significant committee activities at each regular meeting, and evaluates the risks inherent in significant transactions. 15 Non-Employee Director Compensation Non-Employee Director Compensation Policy We believe that a combination of cash and equity compensation is appropriate to attract and retain the individuals we desire to serve on our board of directors and that this approach is comparable to the policies of our peers. We feel that it is appropriate to provide cash compensation to our non-employee directors to compensate them for their time and effort and to provide equity compensation to our non-employee directors to align their long-term interests with those of the Company and our stockholders. In May 2016, our board of directors, upon the recommendation of our compensation committee, adopted our Non-Employee Director Compensation Policy for the compensation of our non-employee directors. In 2017, our compensation committee engaged Compensia, Inc. (‘‘Compensia’’), a national compensation consulting firm, as its compensation consultant to advise on director compensation matters. In doing so, our compensation committee reviewed and considered a peer group study prepared by Compensia. Our compensation committee did not strictly target any specific levels of pay, and instead, used the comparative market data provided by Compensia as an important reference point in its decision-making process. At the recommendation of our compensation committee, we amended and restated the Non-Employee Director Compensation Policy in June 2017 to, among other things, modify the cash retainer policy such that the chair and members of our compensation committee would receive a cash retainer commensurate with that received by the chair and members of our audit committee. Our non-employee directors receive compensation in the form of the cash retainers and equity awards as set forth below. Annual Retainer for Board Membership Annual service on the board of directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional Annual Retainer for Committee Membership Annual service as member of the audit committee (other than chair) . . . . . . . . . . . . . . . . . . Annual service as chair of the audit committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual service as member of the compensation committee (other than chair) . . . . . . . . . . . . Annual service as chair of the compensation committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual service as member of the nominating and corporate governance committee (other $30,000 $ 9,000 $18,000 $ 9,000 $18,000 than chair) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual service as chair of the nominating and corporate governance committee . . . . . . . . . . $ 3,500 $ 7,000 Our policy during fiscal year 2017 provided that, upon initial election to our board of directors, each non-employee director would be granted restricted stock units (‘‘RSUs’’) having a value of $300,000 (the ‘‘Initial Grant’’). In addition, on the date of each of our annual meetings of stockholders, each non-employee director who would continue as a member of our board of directors following such annual meeting of stockholders would be granted an annual award of RSUs having a value of $150,000 (the ‘‘Annual Grant’’). The number of RSUs for the Initial Grant and the Annual Grant were determined by dividing the applicable values by the average closing market price on The New York Stock Exchange (or such other market on which the Company’s Class A common stock is then principally listed) of one share of the Company’s Class A common stock over the trailing 30-day period ending on the last day of the month immediately prior to the month of the grant date. The Initial Grant vests in equal annual installments over three years, subject to continued service as a director through the applicable vesting dates. The Annual Grant vests in full on the earlier of (i) the one-year anniversary of the grant date or (ii) our next annual meeting of stockholders, subject to continued service as a director through the applicable vesting date. Such awards are subject to full accelerated vesting upon a ‘‘sale event,’’ as defined in our 2016 Stock Option and Incentive Plan (the ‘‘2016 Plan’’). 16 The policy also provides that, pursuant to the 2016 Plan, the aggregate amount of compensation, including both equity compensation and cash compensation, paid to any non-employee director in a calendar year will not exceed $750,000 (or such other limit as may be set forth in the 2016 Plan or any similar provision of a successor plan). Employee directors receive no additional compensation for their service as a director. We also reimburse all reasonable out-of-pocket expenses incurred by our non-employee directors for their attendance at meetings of our board of directors or any committee thereof. Non-Employee Directors’ Deferred Compensation Program In July 2017, we implemented a Non-Employee Directors’ Deferred Compensation Program to offer our non-employee directors the ability to defer the receipt of any RSUs granted to them from Initial Grants or Annual Grants under the 2016 Plan. In advance of an award of RSUs and in compliance with the program’s requirements, a non-employee director may elect to defer the receipt of all of his or her RSUs until the earliest of (i) ninety (90) days after such non-employee director ceases to serve as a member of our board of directors; (ii) the consummation of a sale event; or (iii) ninety (90) days after the non-employee director’s death (such earliest date, the ‘‘Payment Event’’). Upon the vesting of the RSUs, any amounts that would otherwise have been paid in shares of Company common stock will be converted into deferred stock units (‘‘DSUs’’) on a one-to-one basis and credited to the non-employee director’s deferred account. The DSUs will be paid in shares of Company common stock on a one-to-one basis in a single lump sum (and will cease to be held in the non-employee director’s deferred account) as soon as practicable following the Payment Event. Stock Ownership Policy In April 2018, we adopted a stock ownership policy for our non-employee directors, which requires such directors to acquire and hold the lesser of (i) a number of shares of our Company’s common stock equal in value to three times the director’s annual cash retainer for regular service on the board of directors or (ii) 2,500 shares of our Company’s common stock, until such director’s service on the board of directors ceases. We only count directly and beneficially owned shares, including shares purchased through our Company’s 2016 Employee Stock Purchase Plan (the ‘‘ESPP’’) or 401(k) plan, if applicable, shares underlying vested RSUs that are held or deferred and shares underlying vested and unexercised in-the-money stock options. Each non-employee director has three years from the later of his or her initial election to the board of directors or from the effective date of the policy to obtain the required ownership level. 2017 Non-Employee Director Compensation Table The following table provides information regarding the total compensation that was earned by or paid to each of our non-employee directors in fiscal year 2017. Mr. Lawson, who is our Chief Executive Officer, did not receive any additional compensation for his service as a director. The compensation P r o x y 17 received by Mr. Lawson, as a named executive officer of the Company, is presented in ‘‘Executive Compensation—Summary Compensation Table’’. Name Fees earned or paid in cash ($) Stock awards ($)(1) Total ($) Richard Dalzell(2) . . . . . . . . . . . . . . . . . . . Byron Deeter(3) . . . . . . . . . . . . . . . . . . . . Elena Donio(4) . . . . . . . . . . . . . . . . . . . . . Jeffrey Epstein(5) . . . . . . . . . . . . . . . . . . . James McGeever(6) . . . . . . . . . . . . . . . . . . Scott Raney(7) . . . . . . . . . . . . . . . . . . . . . Erika Rottenberg(8) . . . . . . . . . . . . . . . . . 33,500 31,750 44,000 19,500 55,000 19,500 51,250 148,744 148,744 148,744 328,908 148,744 — 148,744 182,244 180,494 192,744 348,408 203,744 19,500 199,994 (1) The amounts reported represent the aggregate grant date fair values of the RSUs awarded to the directors in the fiscal year ended December 31, 2017, calculated in accordance with FASB ASC Topic 718. Such grant date fair values do not take into account any estimated forfeitures related to service-based vesting conditions. The valuation assumptions used in determining such amounts are described in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the SEC on March 1, 2018. The amounts reflect the accounting cost for the RSUs and do not correspond to the actual economic value that may be received by the directors upon vesting or settlement of the RSUs. (2) As of December 31, 2017, Mr. Dalzell held an outstanding stock option to purchase a total of 142,500 shares of our Class B common stock and also held 6,005 RSUs. (3) As of December 31, 2017, Mr. Deeter held 6,005 RSUs. (4) As of December 31, 2017, Ms. Donio held 18,456 RSUs. (5) Mr. Epstein joined our Company’s board of directors on July 13, 2017 and received an Initial Grant in July 2017. As of December 31, 2017, Mr. Epstein held 11,157 RSUs. Pursuant to the Non-Employee Director’s Deferred Compensation Program, Mr. Epstein has elected to defer all 11,157 RSUs. (6) As of December 31, 2017, Mr. McGeever held 6,005 RSUs. (7) Mr. Raney resigned from our board of directors effective June 12, 2017. As of December 31, 2017, Mr. Raney held no outstanding equity awards. (8) As of December 31, 2017, Ms. Rottenberg held 21,299 RSUs. 18 PROPOSAL NO. 1 ELECTION OF DIRECTORS Our board of directors is currently composed of seven members. In accordance with our amended and restated certificate of incorporation, our board of directors is divided into three staggered classes of directors. At the Annual Meeting, three Class II directors will be elected for a three-year term to succeed the same class whose term is then expiring. Each director’s term continues until the election and qualification of his or her successor, or such director’s earlier death, resignation or removal. Any increase or decrease 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 our directors. This classification of our board of directors may have the effect of delaying or preventing changes in the control of our Company. Nominees Our nominating and corporate governance committee has recommended, and our board of directors has approved, Byron Deeter, Jeffrey Epstein and Jeff Lawson as nominees for election as Class II directors at the Annual Meeting. If elected, each of Messrs. Deeter, Epstein and Lawson will serve as Class II directors until the 2021 annual meeting of stockholders and until their successors are duly elected and qualified. Each of the nominees is currently a director of our Company. For information concerning the nominees, please see the section titled ‘‘Board of Directors and Corporate Governance.’’ If you are a stockholder of record and you sign your proxy card or vote by telephone or over the Internet but do not give instructions with respect to the voting of directors, your shares will be voted ‘‘FOR’’ the election of Messrs. Deeter, Epstein, and Lawson. We expect that Messrs. Deeter, Epstein, and Lawson will each accept such nomination; however, in the event that a director nominee is unable or declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for any nominee designated by our board of directors to fill such vacancy. If you are a street name stockholder and you do not give voting instructions to your broker or nominee, your broker will leave your shares unvoted on this matter. Vote Required The election of directors requires a plurality of the voting power of the shares of our common stock be present in person or by proxy at the Annual Meeting and entitled to vote thereon to be approved. Broker non-votes will have no effect on this proposal. Recommendation of the Board THE BOARD OF DIRECTORS RECOMMENDS A VOTE ‘‘FOR’’ EACH OF THE NOMINEES NAMED ABOVE. P r o x y 19 PROPOSAL NO. 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Our audit committee has appointed KPMG LLP (‘‘KPMG’’), an independent registered public accounting firm, to audit our consolidated financial statements for our fiscal year ending December 31, 2018. During our fiscal year ended December 31, 2017, KPMG served as our independent registered public accounting firm. Notwithstanding the appointment of KPMG, and even if our stockholders ratify the appointment, our audit committee, in its discretion, may appoint another independent registered public accounting firm at any time during our fiscal year if our audit committee believes that such a change would be in the best interests of our Company and our stockholders. At the Annual Meeting, our stockholders are being asked to ratify the appointment of KPMG as our independent registered public accounting firm for our fiscal year ending December 31, 2018. Our audit committee is submitting the appointment of KPMG to our stockholders because we value our stockholders’ views on our independent registered public accounting firm and as a matter of good corporate governance. Representatives of KPMG will be present at the Annual Meeting, and they will have an opportunity to make a statement and will be available to respond to appropriate questions from our stockholders. If our stockholders do not ratify the appointment of KPMG, our audit committee may reconsider the appointment. Fees Paid to the Independent Registered Public Accounting Firm The following table presents fees for professional audit services and other services rendered to our Company by KPMG for our fiscal years ended December 31, 2016 and 2017. Audit Fees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit-Related Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Fees(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 2017 (in thousands) $1,776 $2,559 $ — $ — $ 129 $ — $ — $ — Total Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,905 $2,559 (1) Audit Fees consist of professional services rendered in connection with the audit of our annual consolidated financial statements, including audited financial statements presented in our Annual Report on Form 10-K and services that are normally provided by the independent registered public accountants in connection with statutory and regulatory filings or engagements for those fiscal years, and the review of the financial statements included in our quarterly reports. Fees for fiscal year 2016 also consisted of professional services rendered in connection with our Registration Statements on Form S-1 related to the initial public offering and follow-on offering of our Class A common stock completed in June 2016 and October 2016, respectively. (2) Tax Fees consist of fees for professional services for tax compliance, tax advice and tax planning. These services include consultation on tax matters and assistance regarding federal, state and international tax compliance. 20 Auditor Independence In our fiscal year ended December 31, 2017, there were no other professional services provided by KPMG, other than those listed above, that would have required our audit committee to consider their compatibility with maintaining the independence of KPMG. Audit Committee Policy on Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm Our audit committee has established a policy governing our use of the services of our independent registered public accounting firm. Under this policy, our audit committee is required to pre-approve all audit, internal control-related services and permissible non-audit services performed by our independent registered public accounting firm in order to ensure that the provision of such services does not impair the public accountants’ independence. All services provided by KPMG for our fiscal years ended December 31, 2016 and 2017 were pre-approved by our audit committee and were compatible with maintaining KPMG’s independence. Vote Required The ratification of the appointment of KPMG as our independent registered public accounting firm for our fiscal year ending December 31, 2018 requires the affirmative vote of a majority of the voting power of the shares of our common stock present in person or by proxy at the Annual Meeting and entitled to vote thereon. Abstentions will have the effect of a vote against this proposal, and broker non-votes will have no effect. Recommendation of the Board THE BOARD OF DIRECTORS RECOMMENDS A VOTE ‘‘FOR’’ THE RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. P r o x y 21 PROPOSAL NO. 3 NON-BINDING ADVISORY VOTE TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS Section 14A of the Exchange Act requires that we provide our stockholders with the opportunity to vote to approve, on a non-binding, advisory basis, not less frequently than once every three years, the compensation of our named executive officers as disclosed in this proxy statement in accordance with the compensation disclosure rules of the SEC. As described in detail under the heading ‘‘Executive Compensation—Compensation Discussion and Analysis,’’ we seek to closely align the interests of our named executive officers with the interests of our stockholders. Our compensation programs are designed to effectively align our executives’ interests with the interests of our stockholders by focusing on long-term equity incentives that correlate with the growth of sustainable long-term value for our stockholders. Stockholders are urged to read the section titled ‘‘Executive Compensation’’ and, in particular, the section titled ‘‘Executive Compensation—Compensation Discussion and Analysis’’ in this proxy statement, which discusses how our executive compensation policies and practices implement our compensation philosophy and contains tabular information and narrative discussion about the compensation of our named executive officers. Our board of directors and our compensation committee believe that these policies and practices are effective in implementing our compensation philosophy and in achieving our compensation program goals. The vote on this resolution is not intended to address any specific element of compensation; rather, the vote relates to the compensation of our named executive officers, as described in this proxy statement in accordance with the compensation disclosure rules of the SEC. Accordingly, we are asking our stockholders to vote on the following resolution at the Annual Meeting: RESOLVED, that the stockholders hereby approve, on a non-binding advisory basis, the compensation paid to the Company’s named executive officers, as disclosed in the Company’s proxy statement for the 2018 Annual Meeting of Stockholders, pursuant to the compensation disclosure rules of the SEC, including in the Compensation Discussion and Analysis, the compensation tables and the narrative discussions that accompany the compensation tables. Vote Required The approval of this advisory non-binding proposal requires the affirmative vote of a majority of the voting power of the shares of our common stock present in person or by proxy at the Annual Meeting and entitled to vote thereon. Abstentions will have the effect of a vote against this proposal, and broker non-votes will have no effect. The vote is advisory, which means that the vote is not binding on the Company, our board of directors or our compensation committee. To the extent there is any significant vote against our named executive officer compensation as disclosed in this proxy statement, our compensation committee will evaluate whether any actions are necessary to address the concerns of stockholders. Recommendation of the Board THE BOARD RECOMMENDS THAT YOU VOTE ‘‘FOR’’ THE APPROVAL, ON A NON-BINDING ADVISORY BASIS, OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS, AS DISCLOSED IN THIS PROXY STATEMENT. 22 PROPOSAL NO. 4 NON-BINDING ADVISORY VOTE ON THE FREQUENCY OF FUTURE NON-BINDING ADVISORY VOTES TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS Section 14A of the Exchange Act provides that stockholders must be given the opportunity to vote, on a non-binding advisory basis, for their preference as to how frequently we should seek future non-binding advisory votes to approve the compensation of our named executive officers, as disclosed in accordance with the compensation disclosure rules of the SEC, which we refer to as an advisory vote to approve the compensation of our named executive officers. By voting with respect to this proposal, stockholders may indicate whether they would prefer that we conduct future non-binding advisory votes to approve the compensation of our named executive officers every one, two or three years. Stockholders also may, if they wish, abstain from casting a vote on this proposal. Our board of directors has determined that an annual non-binding advisory vote to approve the compensation of our named executive officers will allow our stockholders to provide timely and direct input on the Company’s executive compensation philosophy, policies and practices as disclosed in the proxy statement each year. The board of directors believes that an annual vote is therefore consistent with the Company’s efforts to engage in an ongoing dialogue with our stockholders on executive compensation and corporate governance matters. Vote Required Stockholders will not be voting to approve or disapprove of the recommendation of our board of directors. The proxy card provides stockholders with the opportunity to choose among four options with respect to this proposal (holding the vote every one, two or three years, or abstaining). The option that receives the highest number of votes from the voting power of shares of our common stock present in person or by proxy at the Annual Meeting and entitled to vote thereon will be deemed to be the frequency preferred by our stockholders. Abstentions and broker non-votes will have no effect on this proposal. As an advisory vote, this proposal will not be binding on the Company, our board of directors or our compensation committee in any way. As such, the results of the vote will not be construed to create or imply any change to the fiduciary duties of our board of directors. Our board of directors may decide that it is in the best interests of our stockholders and the Company to hold a non-binding advisory vote on our named executive officer compensation more or less frequently than the option approved by our stockholders. Notwithstanding the non-binding advisory nature of this vote, the Company recognizes that the stockholders may have different views as to the best approach for the Company and looks forward to hearing from stockholders as to their preferences on the frequency of a non-binding advisory vote on executive compensation. Recommendation of the Board THE BOARD RECOMMENDS THAT YOU VOTE FOR THE OPTION OF ‘‘ONE YEAR’’ AS THE PREFERRED FREQUENCY FOR FUTURE NON-BINDING ADVISORY VOTES TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS. P r o x y 23 REPORT OF THE AUDIT COMMITTEE The audit committee is a committee of the board of directors comprised solely of independent directors as required by the listing standards of The New York Stock Exchange and rules of the Securities and Exchange Commission (‘‘SEC’’). The audit committee operates under a written charter approved by our board of directors, which is available on our web site at https://investors.twilio.com/. The composition of the audit committee, the attributes of its members and the responsibilities of the audit committee, as reflected in its charter, are intended to be in accordance with applicable requirements for corporate audit committees. The audit committee reviews and assesses the adequacy of its charter and the audit committee’s performance on an annual basis. With respect to our financial reporting process, our management is responsible for (1) establishing and maintaining internal controls and (2) preparing our consolidated financial statements. Our independent registered public accounting firm, KPMG LLP (‘‘KPMG’’), is responsible for performing an independent audit of our consolidated financial statements in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) (‘‘PCAOB’’) and our internal control over financing reporting, expressing an opinion on the conformity of our audited consolidated financial statements with generally accepted accounting principles as well as the effectiveness of our internal control over financial reporting. It is the responsibility of the audit committee to oversee these activities. It is not the responsibility of the audit committee to prepare our financial statements. These are the fundamental responsibilities of management. In the performance of its oversight function, the audit committee has: • reviewed and discussed the audited financial statements for the fiscal year ended December 31, 2017 and management’s report on internal control over financial reporting with management and KPMG; • discussed with KPMG the matters required to be discussed by the statement on Auditing Standards No. 1301, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), and as adopted by the PCAOB in Rule 3200T; and • received the written disclosures and the letter from KPMG required by applicable requirements of the PCAOB regarding the independent accountant’s communications with the audit committee concerning independence and has discussed with KPMG its independence. Based on the audit committee’s review and discussions with management and KPMG, the audit committee recommended to the board of directors that the audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017 for filing with the SEC. Respectfully submitted by the members of the audit committee of the board of directors: Jeffrey Epstein (Chair) James McGeever Erika Rottenberg This report of the audit committee is required by the SEC and, in accordance with the SEC’s rules, will not be deemed to be part of or incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act or under the Exchange Act, except to the extent that we specifically incorporate this information by reference, and will not otherwise be deemed ‘‘soliciting material’’ or ‘‘filed’’ under either the Securities Act or the Exchange Act. 24 EXECUTIVE OFFICERS The following table identifies certain information about our executive officers as of March 31, 2018. Our executive officers are appointed by, and serve at the discretion of, our board of directors and hold office until his or her successor is duly elected and qualified or until his or her earlier resignation or removal. There are no family relationships among any of our directors or executive officers. Name Age Position Jeff Lawson . . . . . . . . . . . Lee Kirkpatrick . . . . . . . . George Hu . . . . . . . . . . . . Karyn Smith . . . . . . . . . . . 40 Co-Founder, Chief Executive Officer and Chairperson 57 Chief Financial Officer 43 Chief Operating Officer 53 General Counsel and Corporate Secretary Executive Officers Jeff Lawson. Mr. Lawson is one of our founders and has served as our Chief Executive Officer and as a member of our board of directors since April 2008 and has served as the Chairperson of our board of directors since November 2015. From 2001 to 2008, Mr. Lawson served as founder and Chief Technology Officer of Nine Star, Inc., a multi-channel retailer of equipment and apparel to the action sports industry. From 2004 to 2005, Mr. Lawson served as Technical Product Manager of Amazon.com, Inc., an electronic commerce and cloud computing company. In 2000, Mr. Lawson served as Chief Technology Officer of StubHub, Inc., an online marketplace for live entertainment events. From 1998 to 2000, Mr. Lawson served in several roles at Versity.com, Inc., a website for college lecture notes, including as founder, Chief Executive Officer and Chief Technology Officer. Mr. Lawson holds a B.S. in Computer Science and Film/Video from the University of Michigan. Mr. Lawson was selected to serve on our board of directors because of the perspective and experience he brings as our Chief Executive Officer, one of our founders and as one of our largest stockholders, as well as his extensive experience as an executive with other technology companies. Lee Kirkpatrick. Mr. Kirkpatrick has served as our Chief Financial Officer since May 2012. From November 2010 to December 2011, Mr. Kirkpatrick served as Chief Financial Officer of SAY Media, Inc., a digital media and advertising firm formed by the combination of VideoEgg, Inc. and SixApart, Ltd. From 2007 to 2010, Mr. Kirkpatrick served as Chief Operating Officer and Chief Financial Officer of VideoEgg, Inc., an online advertising network. From 2005 to 2006, Mr. Kirkpatrick served as Chief Operating Officer of Kodak Imaging Network at the Eastman Kodak Company, an imaging company. From 2000 to 2005, Mr. Kirkpatrick served in several roles at Ofoto Inc., an online photography service, which was acquired by Eastman Kodak Company in 2001, including as Chief Operating Officer and Chief Financial Officer. From 1998 to 2000, Mr. Kirkpatrick served as Chief Financial Officer of iOwn, Inc., an online real estate services website, which was acquired by CitiMortgage, Inc. in 2001. From 1997 to 1998, Mr. Kirkpatrick served as Chief Financial Officer of HyperParallel, Inc., a data mining software company, which was acquired by Yahoo! Inc. in 1998. From 1988 to 1997, Mr. Kirkpatrick served in several roles at Reuters Group PLC, a financial information and news service company, including as Manager of Special Projects, District Finance Manager and Director of Finance and Operations. Mr. Kirkpatrick holds a B.S. in Business Administration from the University of Southern California and an M.B.A. from Columbia University. On February 13, 2018, we announced that Mr. Kirkpatrick had informed us and our board of directors of his decision to retire from the Company. To ensure an orderly transition and continuity of operations, Mr. Kirkpatrick is expected to continue to serve as our Chief Financial Officer until his successor is found and has moved into the role. George Hu. Mr. Hu has served as our Chief Operating Officer since February 2017. From December 2014 to April 2016, Mr. Hu founded and served as Chief Executive Officer at Peer, a 25 P r o x y workplace feedback startup that was acquired by Twitter in 2016. Prior to that, from November 2011 to December 2014, Mr. Hu served as Chief Operating Officer of Salesforce.com, Inc., a leading provider of enterprise cloud computing applications. From 2001 to 2011, Mr. Hu served in a variety of other management roles at Salesforce.com, Inc., including Vice President of Product Marketing, Senior Vice President of Applications, Executive Vice President of Products, and Chief Marketing Officer. Mr. Hu holds an A.B. in Economics from Harvard College and an M.B.A. in Business Administration from the Stanford Graduate School of Business. Karyn Smith. Ms. Smith has served as our General Counsel since September 2014. From October 2013 to August 2014, Ms. Smith served as Chief Operating Officer and General Counsel at Peek, Aren’t You Curious, Inc., a children’s clothing company. From January 2013 to August 2013, Ms. Smith served as General Counsel at Meltwater Group Inc., a software-as-a-service company. From August 2009 to June 2012, Ms. Smith served as Vice President and Deputy General Counsel at Zynga Inc., an online video game company. Prior to Zynga, Ms. Smith was a partner at Cooley LLP, a law firm, where she practiced law for 10 years. Ms. Smith holds a Bachelor of Journalism from the University of Missouri, Columbia and a J.D. from Santa Clara University School of Law. 26 Compensation Discussion and Analysis EXECUTIVE COMPENSATION This Compensation Discussion and Analysis describes the compensation program for our named executive officers. During the fiscal year ending December 31, 2017, these individuals were: • Jeff Lawson, our Chief Executive Officer and Chairperson of our Board of Directors; • Lee Kirkpatrick, our Chief Financial Officer; • George Hu, our Chief Operating Officer; and • Karyn Smith, our General Counsel. This Compensation Discussion and Analysis describes the material elements of our executive compensation program during 2017. It also provides an overview of our executive compensation philosophy and objectives. Finally, it discusses how our compensation committee of our board of directors arrived at the specific compensation decisions for our executive officers, including our named executive officers, for 2017, including the key factors that our compensation committee considered in determining their compensation. Chief Financial Officer Transition On February 13, 2018, we announced that Mr. Kirkpatrick, who has served as our Chief Financial Officer since May 2012, had informed us and our board of directors of his decision to retire from the Company. To ensure an orderly transition and continuity of operations, Mr. Kirkpatrick is expected to continue to serve as our Chief Financial Officer until his successor is found and has moved into the role. The search process has begun and is expected to be completed before the end of the fiscal year. P r o x y Executive Summary Business Overview We are the leader in the Cloud Communications Platform category. We believe the future of communications will be written in software, by the developers of the world—our customers. By empowering them, our mission is to fuel the future of communications. We enable developers to build, scale and operate real-time communications within their software applications via our simple-to-use Application Programming Interfaces (‘‘APIs’’). The power, flexibility and reliability offered by our software building blocks empower companies of virtually every shape and size to build world-class engagement into their customer experience. Our platform consists of three layers: our Engagement Cloud, Programmable Communications Cloud and Super Network. Our Engagement Cloud software is a set of APIs that handles the higher level communication logic needed for nearly every type of customer engagement. These APIs are focused on the business challenges that a developer is looking to address, allowing our customers to more quickly and easily build better ways to engage with their customers throughout their journey. Our Programmable Communications Cloud software is a set of APIs that enables developers to embed voice, messaging and video capabilities into their applications. The Programmable Communications Cloud is designed to support almost all the fundamental ways humans communicate, unlocking innovators to address just about any communication market. Our Super Network is our software layer that allows our customers’ software to communicate with connected devices globally. It interconnects with communications networks around the world and continually analyzes data to optimize the quality and cost of communications that flow through our platform. The Super Network also contains a set of APIs that gives our customers access to more foundational components of our platform, such as telephone numbers. 27 As of December 31, 2017, our customers’ applications that are embedded with our products could reach users via voice, messaging and video in nearly every country in the world, and our platform offered customers local telephone numbers in over 100 countries and text-to-speech functionality in 26 languages. We support our global business through 27 cloud data centers in nine regions around the world and have developed contractual relationships with network service providers globally. Fiscal 2017 Performance Highlights During 2017, we continued to grow revenue and diversify our business: • We recorded total revenue of $399.0 million for the full year, up 44% from the full year 2016 revenue of $277.3 million; • We recorded Base Revenue of $365.5 million for the full year, up 49% from the full year 2016 base revenue of $245.5 million; • We recorded a GAAP loss from operations of $66.1 million for the full year, compared with a GAAP loss from operations of $41.3 million for the full year 2016. Our non-GAAP loss from operations was $20.1 million for the full year, compared with a non-GAAP loss from operations of $12.2 million for the full year 2016; and • We had 48,979 Active Customer Accounts as of December 31, 2017, compared to 36,606 Active Customer Accounts as of December 31, 2016. Please refer to Appendix A of this proxy statement for a more detailed discussion of how we measure Base Revenue, Active Customer Accounts and other key business metrics and for a reconciliation of GAAP loss from operations to non-GAAP loss from operations. Executive Compensation Highlights Based on our overall operating environment and these results, our compensation committee took the following key actions with respect to the compensation of our named executive officers for 2017: • Base Salary—Approved annual base salary increases ranging from 18.5% to 31.6% as we continue to move the target total cash compensation of our named executive officers (other than our Chief Executive Officer) closer to the market median and, at our Chief Executive Officer’s request, approved his base salary to remain at its 2016 level. • Long-Term Incentive Compensation—Granted long-term incentive compensation opportunities to our named executive officers (other than our Chief Executive Officer and our Chief Operating Officer) in the form of time-based stock options to purchase shares of our Class A common stock and time-based RSUs that may be settled for shares of our Class A common stock, with aggregate grant date fair values ranging from approximately $1,903,755 to approximately $3,067,190, as well as a time-based stock option to purchase shares of our Class A common stock and time-based RSUs that may be settled for shares of our Class A common stock for our Chief Executive Officer with an aggregate grant date fair value of approximately $5,288,274. • No Annual Cash Bonus Program—Since July 1, 2015, we have not maintained a formal annual cash bonus plan for any of our executive officers, including our named executive officers. • Special Bonus for Ms. Smith—On June 12, 2017, our compensation committee approved the award of a special, one-time cash bonus to Ms. Smith, our General Counsel, in the amount of $125,000. This bonus was awarded to Ms. Smith in recognition of her services and contributions to us as our interim Chief People Officer during the period between May 2016 and June 2017. 28 • Appointment of Chief Operating Officer—On February 28, 2017, Mr. Hu was hired as our Chief Operating Officer. In connection with his appointment, we entered into an employment offer letter with him providing for the following compensation arrangements: • An initial annual base salary of $600,000; • The grant of a time-based stock option to purchase 900,000 shares of our Class A common stock with an exercise price of $31.72 per share, generally vesting over four years, subject to his continued employment with us through each applicable vesting date, and subject further to certain vesting acceleration provisions; • The grant of time-based RSUs that may be settled for 100,000 shares of our Class A common stock, generally vesting over four years, subject to his continued employment with us through each applicable vesting date, and subject further to certain vesting acceleration provisions; • The grant of three performance-based stock options to purchase an aggregate of 555,000 shares of our Class A common stock, each with an exercise price of $31.72 per share. Each such performance-based stock option will only begin to vest if certain pre-established target levels tied to our revenue are achieved by certain specified dates. If the performance conditions applicable to each performance-based stock option are satisfied, then the stock option will immediately vest with respect to 50% of the shares subject thereto and will thereafter vest in equal monthly installments over 24 months with respect to the remaining shares subject thereto. If the applicable revenue target is not achieved by the applicable date, then the relevant performance-based stock option will be forfeited at that time. Such performance-based stock options are subject to certain vesting acceleration provisions; and • Participation in our Amended and Restated Executive Severance Plan (as described further in ‘‘Potential Payments Upon Termination or Change in Control—Amended and Restated Executive Severance Plan’’ below). Mr. Hu’s employment offer letter was negotiated on our behalf by our Chief Executive Officer. In establishing the compensation arrangements for Mr. Hu, we took into consideration several factors, including (i) the requisite experience and skills that a qualified chief operating officer candidate for our Company would need to lead and manage a growing business in a dynamic and ever-changing environment, (ii) the competitive market for superior candidates at other comparable companies based on a review of competitive market data, including data drawn from the companies in our compensation peer group, various aspirational companies and selected compensation surveys, (iii) his then-current compensation at his prior employer, including the estimated amount of compensation he would forfeit by accepting employment with us, (iv) the need to integrate our new chief operating officer into our existing executive compensation structure, balancing both competitive and internal equity considerations as well as his existing compensation package and (v) the advice of Compensia, our compensation committee’s independent compensation consultant. Following negotiations with Mr. Hu, whom our Chief Executive Officer, compensation committee and our board of directors as a whole, believed was the strongest candidate to help our Company achieve its short-term and long-term ‘‘go-to-market’’ strategy and expansion goals, our compensation committee approved Mr. Hu’s compensation arrangements and granted him the performance-based stock options described above. Given that our sales function would report directly to Mr. Hu as Chief Operating Officer, the compensation committee believed that directly tying some of his initial equity grant to our revenue growth over a multi-year (four-year) period was another way to closely align his interests with those of our stockholders. P r o x y 29 The terms and conditions of the Amended and Restated Executive Severance Plan and Mr. Hu’s employment offer letter as they relate to his post-employment compensation arrangements are described in the sections titled ‘‘Post-Employment Compensation Arrangements’’, ‘‘Employment Agreements or Offer Letters with Named Executive Officers’’ and ‘‘Potential Payments Upon Termination or Change in Control’’ below. Pay-for-Performance Analysis We believe our executive compensation program is reasonable and competitive, and appropriately balances the goals of attracting, motivating, rewarding and retaining our executive officers with the goal of aligning their interests with those of our stockholders. The annual compensation of our executive officers, including our named executive officers, varies from year to year based on our corporate financial and operational results and individual performance. While we do not determine either ‘‘variable’’ or ‘‘fixed’’ pay for each named executive officer with reference to a specific percentage of target total direct compensation, consistent with our ‘‘pay-for-performance’’ philosophy, our executive compensation program emphasizes ‘‘variable’’ pay over ‘‘fixed’’ pay. In 2017, the majority of the target total direct compensation of our Chief Executive Officer consisted of variable pay in the form of long-term incentive compensation opportunities. Fixed pay, primarily consisting of base salary, made up only 2.5% of our Chief Executive Officer’s target total direct compensation, while contingent (‘‘variable’’) pay, consisting of long-term incentive compensation in the form of equity awards, made up 97.5% of his target total direct compensation. Similar allocations applied to our other executive officers, including our other named executive officers. The following charts show the percentages of target variable pay versus target fixed pay for our Chief Executive Officer and our other named executive officers in 2017: Chief Executive Officer Target Pay Mix Average Other Named Executive Officer Target Pay Mix 51% 3% 46% 45% 15% 40% Base Salary Stock Options 21APR201806481686 RSUs Base Salary Stock Options 21APR201806481811 RSUs We believe that this approach provides balanced incentives for our executive officers to drive our Company’s financial performance and long-term growth. Executive Compensation Policies and Practices We endeavor to maintain sound governance standards consistent with our executive compensation policies and practices. Our compensation committee evaluates our executive compensation program on at least an annual basis to ensure that it is consistent with our short-term and long-term goals given the 30 dynamic nature of our business and the market in which we compete for executive talent. The following summarizes our executive compensation and related policies and practices: What We Do What We Don’t Do Use a Pay-for-Performance Philosophy. The majority of our executive officers’ target total direct compensation is directly linked to the performance of our stock price. Compensation ‘‘At-Risk.’’ Our executive compensation program is designed so that a significant portion of our executive officers’ target total direct compensation is equity- based, and therefore ‘‘at risk,’’ to align the interests of our executive officers and stockholders. ‘‘Double-Trigger’’ Change-in-Control Arrangements. With the exception of certain equity awards granted to one named executive officer, the terms of which were determined through arm’s length negotiations at the time of hire, all of our post-employment compensation arrangements in the event of a change in control of the Company are ‘‘double-trigger’’ arrangements that require both a change in control of the Company plus a qualifying termination of employment before payments and benefits are paid. All such payments and benefits are also subject to the execution and delivery of an effective release of claims in favor of our Company. Maintain an Independent Compensation Committee. Our compensation committee consists solely of independent directors. No Retirement Plans. We do not currently offer pension arrangements, nonqualified deferred compensation arrangements or retirement plans to our executive officers other than a 401(k) retirement plan that is generally available to all our U.S. employees. No Short-Term Cash Bonus Program or Guaranteed Bonuses. We do not maintain a formal cash bonus program for our executive officers, nor do we provide guaranteed bonuses to our executive officers. Limited Perquisites or Other Personal Benefits. We provide limited perquisites and other personal benefits to our executive officers, which, in 2017, consisted of individual supplemental long-term disability insurance, reimbursements for our Chief Executive Officer’s costs incurred in connection with his filing under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (‘‘HSR’’) and reimbursements for our Chief Operating Officer’s legal costs incurred in connection with the negotiation of his employment offer letter. Limited Tax Payments on Perquisites. We generally do not provide any tax reimbursement payments (including ‘‘gross-ups’’) on any perquisites or other personal benefits except that, in 2017, we provided a tax gross-up to our Chief Executive Officer with respect to the income that he recognized as a result of our payment for his HSR filing. P r o x y 31 What We Do What We Don’t Do Retain an Independent Compensation Advisor. Our compensation committee has engaged its own independent compensation advisor to provide information, analysis and other advice on executive compensation independent of management. No Excise Tax Payments on Future Post-Employment Compensation Arrangements. We do not provide any excise tax reimbursement payments (including ‘‘gross-ups’’) with respect to payments or benefits contingent upon a change in control of our Company. Annual Executive Compensation Review. Our compensation committee conducts an annual review of our compensation strategy, including a review of our compensation peer group used for comparative purposes. No Hedging. We prohibit our employees, including our executive officers, and the non-employee members of our board of directors from engaging in certain derivative transactions relating to our securities. Annual Compensation-Related Risk Assessment. Our compensation committee reviews, on an annual basis, our compensation- related risk profile. Stock Ownership Policy. We maintain a stock ownership policy for our Chief Executive Officer, our other named executive officers and the non-employee members of our board of directors. No Pledging. We prohibit our executive officers and the non-employee members of our board of directors from holding our securities in a margin account or pledging our securities as collateral for a loan. No Special Welfare or Health Benefits. We do not provide our executive officers with any special welfare or health benefit programs, other than individual supplemental long-term disability insurance and participation on the same basis as all of our full-time employees in the employee programs that are standard in our industry sector. Say-on-Pay Vote on Executive Compensation In prior years, we were an ‘‘emerging growth company’’ as defined in the Jumpstart Our Business Startups Act of 2012 and were not required to hold a non-binding, advisory vote on the compensation of our named executive officers (a ‘‘Say-on-Pay vote’’). At the 2018 Annual Meeting of Stockholders, we will be conducting our first Say-on-Pay vote as described in Proposal No. 3 of this proxy statement. Because we value the opinions of our stockholders, the board of directors and our compensation committee will consider the outcome of the Say-on-Pay vote, and the related Say-on-Frequency vote described in Proposal No. 4 of this proxy statement, as well as feedback received throughout the year, when making compensation decisions for our named executive officers in the future. Executive Compensation Philosophy Our executive compensation program is guided by our overarching philosophy of paying for demonstrable performance and aligning the compensation of our executive officers with the long-term interests of our stockholders. Consistent with this philosophy, we have designed our executive compensation program to achieve the following primary objectives: • attract, motivate, incentivize and retain employees at the executive level who contribute to our long-term success; • provide compensation packages to our executive officers that are competitive and reward the achievement of our business objectives; and 32 • effectively align our executive officers’ interests with the interests of our stockholders by focusing on long-term equity incentives that correlate with the growth of sustainable long-term value for our stockholders. Because we do not have a cash bonus program for our executive officers, generally, our compensation committee has sought to set base salaries at the higher end of the competitive market range to provide what it believes to be reasonable cash compensation levels and will serve to attract and retain our executives. Further, our compensation committee tends to weight the target total direct compensation opportunities of our executive officers more heavily towards equity compensation. Oversight of Executive Compensation Program Role of the Compensation Committee Our compensation committee discharges many of the responsibilities of our board of directors relating to the compensation of our executive officers, including our named executive officers, and the non-employee members of our board of directors (as described further in ‘‘Board of Directors and Corporate Governance—Non-Employee Director Compensation’’ above). Our compensation committee has overall responsibility for overseeing our compensation structure, policies and programs generally, and overseeing and evaluating the compensation plans, policies and practices applicable to our executive officers. Our compensation committee has the authority to retain, and has retained, an independent compensation consultant to provide support to the committee in its review and assessment of our compensation programs. Compensation-Setting Process Our compensation committee determines the target total direct compensation opportunities for our executive officers, including our named executive officers. Our compensation committee does not use a single method or measure in developing its recommendations, nor does it establish specific targets for the total direct compensation opportunities of our executive officers. Nonetheless, as it continues to position the compensation of our named executive officers to levels that are more consistent with those of a public company, generally, our compensation committee begins its deliberations on cash and equity compensation levels with reference to various percentile levels for cash compensation and target total direct compensation as reflected in competitive market data. When formulating its recommendations for the amount of each compensation element and approving each compensation element and the target total direct compensation opportunity for our executive officers, our compensation committee considers the following factors: • our performance against the financial and operational objectives established by our compensation committee and our board of directors; • our financial performance relative to our compensation peer group; • the compensation levels and practices of our compensation peer group; • each individual executive officer’s skills, experience and qualifications relative to other similarly- situated executives at the companies in our compensation peer group; • the scope of each individual executive officer’s role compared to other similarly-situated executives at the companies in our compensation peer group; • the performance of each individual executive officer, based on a subjective assessment of his or her contributions to our overall performance, ability to lead his or her business unit or function and ability to work as part of a team, all of which reflect our core values; • compensation parity among our individual executive officers; and 33 P r o x y • the recommendations provided by our Chief Executive Officer with respect to the compensation of our other executive officers. These factors provide the framework for compensation decision-making and final decisions regarding the compensation opportunity for each executive officer. No single factor is determinative in setting pay levels, nor was the impact of any factor on the determination of pay levels quantifiable. Our compensation committee reviews the base salary levels and long-term incentive compensation opportunities of our executive officers, including our named executive officers, each fiscal year at the beginning of the year, or more frequently as warranted. Long-term incentive compensation is granted on a regularly-scheduled basis, as described in ‘‘Other Compensation Policies and Practices—Equity Awards Grant Policy’’ below. Role of Chief Executive Officer In discharging its responsibilities, our compensation committee works with members of our management, including our Chief Executive Officer. Our management assists our compensation committee by providing information on corporate and individual performance, market compensation data and management’s perspective on compensation matters. Our compensation committee solicits and reviews our Chief Executive Officer’s recommendations and proposals with respect to adjustments to annual cash compensation, long-term incentive compensation opportunities, program structures and other compensation-related matters for our executive officers (other than with respect to his own compensation). Our compensation committee reviews and discusses these recommendations and proposals with our Chief Executive Officer and considers them as one factor in determining the compensation for our executive officers, including our other named executive officers. Our Chief Executive Officer recuses himself from all discussions and recommendations regarding his own compensation. Role of Compensation Consultant Our compensation committee engages an external independent compensation consultant to assist it by providing information, analysis and other advice relating to our executive compensation program and the decisions resulting from its annual executive compensation review. For 2017, our compensation committee engaged Compensia as its compensation consultant to advise on executive compensation matters, including competitive market pay practices for our executive officers, the selection of our compensation peer group, and data analysis. For 2017, the scope of Compensia’s engagement included: • researching, developing, and reviewing our compensation peer group; • reviewing and analyzing the compensation for our executive officers, including our named executive officers; • supporting the design and implementation of changes to our executive long-term incentive strategy; • providing analysis of market practice and supporting the consideration and finalization of changes to our Amended and Restated Executive Severance Plan; • reviewing and providing input on the Compensation Discussion and Analysis section of our proxy statement for our 2018 Annual Meeting of Stockholders; • providing competitive market data and analysis to support the determination of the compensation arrangements that we negotiated in connection with the hiring of our Chief Operating Officer; and • supporting other ad hoc matters throughout the year. 34 The terms of Compensia’s engagement included reporting directly to our compensation committee and to our compensation committee chair. Compensia also coordinated with our management for data collection and job matching for our executive officers. In 2017, Compensia did not provide any other services to us. In April 2017, our compensation committee evaluated Compensia’s independence pursuant to the NYSE Listing Standards and the relevant SEC rules and determined that no conflict of interest had arisen as a result of the work performed by Compensia. Competitive Positioning For purposes of comparing our executive compensation against the competitive market, our compensation committee reviews and considers the compensation levels and practices of a group of peer companies. This compensation peer group consists of technology companies that are similar to us in terms of industry, revenue and market capitalization. In developing the compensation peer group for 2017, the following criteria were observed in identifying comparable companies: • similar industry and competitive market for talent; • within a range of 0.5x to 2.0x of our revenue; and • within a range of 0.3x to 3.0x of our market capitalization. Our compensation committee reviews our compensation peer group at least annually and makes adjustments to its composition if warranted, taking into account changes in both our business and the businesses of the companies in the peer group. At the beginning of 2017, our compensation committee used the following compensation peer group to assist with the determination of compensation for our executive officers. Our compensation committee approved this peer group in December 2016 following a review that included input from Compensia. P r o x y Acacia Communications Box Cornerstone OnDemand FireEye Guidewire Software HubSpot LogMeIn New Relic Nutanix Paycom Software Paylocity Holding Proofpoint RingCentral ServiceNow Splunk Tableau Software Veeva Systems Workday Zendesk In June 2017, our compensation committee, upon the recommendation of Compensia, added Mulesoft to the compensation peer group. Our compensation committee uses data drawn from our compensation peer group, as well as data from the Radford Global Technology executive compensation survey (the ‘‘Radford Survey’’), to evaluate the competitive market when formulating its recommendation for the total direct compensation packages for our executive officers, including base salary and long-term incentive compensation opportunities. The Radford Survey provides compensation market intelligence and is widely used within the technology industry. In addition, subsets of the Radford Survey were incorporated into the competitive assessment prepared by Compensia and used by our compensation committee to evaluate the compensation of our executive officers. Specifically, our compensation committee received a custom report of survey results reflecting only companies from our compensation peer group in addition to survey results tailored solely based on revenue. The Radford Survey data supplements the compensation peer group data and 35 provides additional information for our named executive officers and other vice president positions for which there is less public comparable data available. Individual Compensation Elements In 2017, the principal elements of our executive compensation program, and the purposes for each element, were as follows: Element Compensation Element Objective Base Salary . . . . . . . . . Cash Long-Term Incentives . . Equity awards in the form of stock options to purchase shares of our Class A common stock and RSUs that may be settled for shares of our Class A common stock Designed to attract and retain highly talented executives by providing fixed compensation amounts that are competitive in the market and reward performance. Designed to align the interests of our executive officers and our stockholders by motivating them to achieve long-term stockholder value creation. Also designed to achieve our retention objectives for our executive officers. Base Salary Base salary represents the fixed portion of the compensation of our executive officers, including our named executive officers, and is an important element of compensation intended to attract and retain highly-talented individuals. Using the competitive market data provided by its compensation consultant, our compensation committee reviews and develops recommendations for adjusting the base salaries for each of our executive officers, including our named executive officers, as part of its annual executive compensation review. In addition, the base salaries of our executive officers may be adjusted by our compensation committee in the event of a promotion or significant change in responsibilities. Generally, our compensation committee sets base salaries with reference to various percentile levels of the competitive range of our compensation peer group and applicable executive compensation survey data. Since our initial public offering, we have evaluated the base salaries of our executive officers in the context of establishing their total cash compensation at levels that are consistent with the target total cash compensation of executive officers holding comparable positions at a public company. In February 2017, consistent with the recommendation of our Chief Executive Officer, our compensation committee determined to increase the base salaries of our executive officers, including our named executive officers (other than our Chief Executive Officer). In making these decisions, our compensation committee considered the current risks and challenges facing us, our decision to forego the adoption of an annual cash bonus program, its objective of gradually positioning the target total cash compensation of our executive officers at levels that are more consistent with those of a public company in our industry, as well as the factors described in ‘‘Oversight of Executive Compensation Program—Compensation-Setting Process’’ above. At our Chief Executive Officer’s request, and to weight more of his target total direct compensation to variable pay in the form of long-term incentive compensation, the compensation committee determined to maintain the base salary of our Chief Executive Officer at its 2016 level. 36 The base salaries of our named executive officers for 2017 were adjusted as follows: Named Executive Officer 2016 Base Salary 2017 Base Salary(1) Percentage Adjustment Mr. Lawson . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Kirkpatrick . . . . . . . . . . . . . . . . . . . . . . . Mr. Hu(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . Ms. Smith . . . . . . . . . . . . . . . . . . . . . . . . . . . $133,700 $380,000 — $337,500 $133,700 $500,000 $600,000 $400,000 — 31.6% — 18.5% (1) These annual base salary adjustments were effective retroactively to January 1, 2017. (2) Mr. Hu joined our Company in February 2017. The actual base salaries paid to our named executive officers in 2017 are set forth in the ‘‘Summary Compensation Table’’ below. Long-Term Incentive Compensation We view long-term incentive compensation in the form of equity awards as a critical element of our executive compensation program. The realized value of these equity awards bears a direct relationship to our stock price, and, therefore, these awards are an incentive for our executive officers, including our named executive officers, to create value for our stockholders. Equity awards also help us retain qualified executive officers in a competitive market. Long-term incentive compensation opportunities in the form of equity awards are granted by our compensation committee on a regularly-scheduled basis, as described in ‘‘Other Compensation Policies and Practices—Equity Awards Grant Policy’’ below. The amount and forms of such equity awards are determined by our compensation committee after considering the factors described in ‘‘Oversight of Executive Compensation Program—Compensation-Setting Process’’ above. The amounts of the equity awards are also intended to provide competitively-sized awards and resulting target total direct compensation opportunities that are competitive with the compensation opportunities offered by the companies in our compensation peer group and Radford Survey data for similar roles and positions for each of our executive officers, taking into consideration the factors described in ‘‘Oversight of Executive Compensation Program—Compensation-Setting Process’’ above. In February 2017, prior to the hiring of our Chief Operating Officer, our compensation committee determined that the equity awards to be granted to our executive officers should be in the form of time-based stock options to purchase shares of our Class A common stock and time-based RSUs that may be settled for shares of our Class A common stock. After considering the factors described in ‘‘Oversight of Executive Compensation Program—Compensation-Setting Process’’ above, our compensation committee approved the following equity awards for our then-existing named executive officers in 2017 as part of its annual executive compensation review: Named Executive Officer Stock Options to Purchase Shares of Class A Common Stock (number of shares) Time-Based RSUs (number of shares) Jeff Lawson . . . . . . . . . . . . . . . . . . Lee Kirkpatrick . . . . . . . . . . . . . . . Karyn Smith . . . . . . . . . . . . . . . . . 163,890 95,056 59,000 87,271 50,617 31,417 Aggregate Grant Date Fair Value ($) $5,288,274 $3,067,190 $1,903,755 P r o x y 37 In connection with the appointment of Mr. Hu as our Chief Operating Officer, our compensation committee approved the grant of the equity awards described in the section titled ‘‘Executive Summary—Executive Compensation Highlights—Appointment of Chief Operating Officer’’ above. Stock Options We believe that stock options provide a strong reward for growth in the market price of our common stock as their entire value depends on future stock price appreciation, as well as a strong incentive for our executive officers to remain employed with our Company as they require continued employment through the vesting period. The stock options to purchase shares of our Class A common stock generally have a 10-year term and generally vest as to one-quarter of such shares on the first anniversary of the ‘‘vesting commencement date’’ and thereafter as to 1/48th of the shares subject to the stock option each month, subject to the named executive officer’s continued employment with us through each applicable vesting date. Consistent with our compensation objectives, we believe this approach aligns our executive officers’ efforts and contributions with our long-term interests and allows them to participate in any future appreciation in value of our common stock. Pursuant to our Chief Operating Officer’s employment offer letter, he was granted time-based stock options for a seven-year term and performance-based stock options to purchase shares of our Class A common stock, for reasons described in ‘‘Executive Summary—Executive Compensation Highlights—Appointment of Chief Operating Officer’’ above. The performance-based stock options will only begin to vest if certain pre-established target levels tied to our revenue are achieved by certain specified dates, the disclosure of which would cause potential significant competitive harm to us without adding meaningfully to the understanding of our business, since our revenue projections are based on our internal forecasts and confidential information about our business. However, the compensation committee has set such performance-based metrics at definitive, rigorous and objective levels which we believe are sufficiently high so as to require substantial effort and achievement by our Chief Operating Officer to be attained. We believe it would be difficult, though not unattainable, for such revenue targets to be reached. To date, we have only granted performance-based stock options to our Chief Operating Officer in connection with his hiring for the reasons described in ‘‘Executive Summary— Executive Compensation Highlights—Appointment of Chief Operating Officer’’ above. Our Chief Operating Officer’s employment offer letter, including the terms of his performance-based stock options, were established after arms’ length negotiations with him and our consideration, at the time of his hire, of the requisite experience and skills that a qualified Chief Operating Officer candidate for the Company would need, as well as the competitive market for similar positions at other comparable companies, as described in more detail in ‘‘Executive Summary—Executive Compensation Highlights— Appointment of Chief Operating Officer’’ above. In addition, we believe that it was appropriate to grant our Chief Operating Officer these performance-based stock options as a way to further align him with our stockholders, as the value of any amount earned pursuant to the performance-based stock options is directly tied to our revenue over a long-term period (at least four years). A portion of such performance-based stock options vest over time as well, which incentivizes retention. Time-Based RSUs We believe time-based RSUs also provide a strong retention incentive for our executive officers, provide a moderate reward for growth in the value of our common stock and, because they use fewer shares than stock options, are less dilutive to our stockholders. The time-based RSUs that may be settled for shares of our Class A common stock generally vest as to 13/48th of the shares subject to the award on the first anniversary of the applicable ‘‘vesting commencement date’’, as to 1/16th of the shares subject to the award as of the end of each of the next 11 fiscal quarters and as to 1/24th of the shares subject to the award as of the end of the next fiscal quarter thereafter, subject to the named executive officer’s continued employment with us through each applicable vesting date. The time-based 38 RSUs for Mr. Hu vest as to 25% of the shares subject to the award on the first anniversary of the applicable ‘‘vesting commencement date’’ and as to 1/16th of the shares subject to the award as of the end of each of the next 12 quarters thereafter, subject to Mr. Hu’s continued employment with us through each applicable vesting date. The equity awards granted to our named executive officers in 2017 are set forth in the ‘‘Summary Compensation Table’’ and the ‘‘Grants of Plan-Based Awards Table’’ below. One-Time Cash Bonus On June 12, 2017, our compensation committee approved an award of a special one-time cash bonus to Ms. Smith in the amount of $125,000 in recognition of her services and contribution to us as our interim Chief People Officer during the period between May 2016 and June 2017. The cash bonus paid to Ms. Smith in 2017 is set forth in the ‘‘Summary Compensation Table’’ below. Health and Welfare Benefits Our executive officers, including our named executive officers, are eligible to receive the same employee benefits that are generally available to all our full-time employees, subject to the satisfaction of certain eligibility requirements. These benefits include our medical, dental and vision insurance and life and disability insurance plans. In structuring these benefit plans, we seek to provide an aggregate level of benefits that are comparable to those provided by similar companies. In addition, we maintain a tax-qualified 401(k) retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax-advantaged basis. Plan participants are able to defer eligible compensation subject to the applicable annual limits set forth in the Code. In 2017, we matched 50% of each dollar contributed by participants in the 401(k) plan up to an annual maximum of $2,500. We have the ability to make discretionary contributions to the 401(k) plan but have not done so to date. The 401(k) plan is intended to be qualified under Section 401(a) of the Code with the plan’s related trust intended to be tax exempt under Section 501(a) of the Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan. Perquisites and Other Personal Benefits Currently, we do not view perquisites or other personal benefits as a significant component of our executive compensation program. Accordingly, we do not provide significant perquisites or other personal benefits to our executive officers, including our named executive officers, except as generally made available to our employees, or in situations where we believe it is appropriate to assist an individual in the performance of his or her duties, to make our executive officers more efficient and effective and for recruitment and retention purposes. For example, in addition to the standard group plan available to all U.S. employees, we pay the premiums for individual supplemental long-term disability insurance for employees who qualify for the plan, including our executive officers and employees above a certain salary threshold. The additional individual long-term disability insurance premiums we offer provides up to an additional $5,000 per month per individual and brings the total long-term disability insurance benefit for our executive officers closer to the level of coverage offered to other employees who do not participate in the plan. During 2017, none of our named executive officers received perquisites or other personal benefits that were, in the aggregate, $10,000 or more for each individual, except our Chief Executive Officer, for whom we paid his filing fee under HSR, as well as a tax gross-up related to such fee and except our Chief Operating Officer, for whom we reimbursed legal fees associated with the negotiation of his 39 P r o x y employment offer letter. We believe that reimbursing our Chief Executive Officer for the HSR filing fee and its related tax consequences was consistent with our decision to continue to compensate him almost entirely through equity-compensation arrangements. Absent this regulatory filing, our Chief Executive Officer would not be able to participate in our long-term incentive compensation program and, therefore, we determined that it was appropriate for us to reimburse him for this filing fee and any related tax liabilities. In addition, we believe that reimbursing Mr. Hu for his legal fees in connection with the negotiation of his employment offer letter was appropriate and necessary to recruit him. In the future, we may provide perquisites or other personal benefits in limited circumstances. All future practices with respect to perquisites or other personal benefits will be approved and subject to periodic review by our compensation committee. Post-Employment Compensation Arrangements We believe that having in place reasonable and competitive post-employment compensation arrangements are essential to attracting and retaining highly-qualified executive officers. We included certain provisions for payments and benefits in the event of a termination of employment, including an involuntary termination of employment in connection with a change in control of our Company, in the initial employment offer letters and equity award agreements with certain of our named executive officers. However, in connection with our initial public offering, we adopted an executive severance plan (as amended and restated in June 2017, the ‘‘Amended and Restated Executive Severance Plan’’) to provide more standardized severance payments and benefits to our executive officers and to supersede and replace the severance provisions in their employment offer letters or equity award agreements, if any, with payments and benefits that are aligned with competitive market practices as reflected by our compensation peer group. The Amended and Restated Executive Severance Plan, as discussed in more detail in ‘‘Potential Payments Upon Termination or Change in Control—Amended and Restated Executive Severance Plan’’ below is designed to help ensure the continued service of key executive officers in an acquisition context, to provide reasonable compensation to executive officers who leave our employ under specified circumstances and to align the interests of our executive officers and our stockholders when considering our long-term future. We believe that the severance payments and benefits provided to our executive officers under the Amended and Restated Executive Severance Plan (and for our Chief Operating Officer, such plan and his employment offer letter) are appropriate in light of the post-employment compensation protections available to similarly-situated executive officers at companies in our compensation peer group and are an important component of each executive officer’s overall compensation as they help us to attract and retain our key executives who could have other job alternatives that may appear to them to be more attractive absent these protections. We also believe that the occurrence or potential occurrence of a change in control transaction will create uncertainty regarding the continued employment of our executive officers. In order to encourage them to remain employed with us during an important time when their prospects for continued employment following the transaction are often uncertain, we provide our executive officers with the opportunity to receive additional severance protections during a change in control protection period. In addition, we provide additional payment and benefit protections if an executive officer voluntarily terminates employment with us for good reason in connection with a change in control of our Company, because we believe that a voluntary termination of employment for good reason is essentially equivalent to an involuntary termination of employment by us without cause. The primary purpose of these arrangements is to keep our most senior executive officers focused on pursuing potential corporate transactions that are in the best interests of our stockholders regardless of whether those 40 transactions may result in their own job loss. Reasonable post-acquisition payments and benefits should serve the interests of both the executive officer and our stockholders. To protect the Company’s interests, we require all participants of the Amended and Restated Severance Plan to sign our standard form of release prior to receiving any severance payments or benefits under the plan. In addition, except with respect to the equity awards granted to our Chief Operating Officer in connection with his employment offer letter, all payments and benefits provided in the event of a change in control of the Company are payable only if there is a qualifying loss of employment by a named executive officer (commonly referred to as a ‘‘double-trigger’’ arrangement). In the case of the acceleration of vesting of outstanding equity awards, we use this double-trigger arrangement to protect against the loss of retention value following a change in control of the Company and to avoid windfalls, both of which could occur if the vesting of equity awards accelerated automatically as a result of the transaction. As a result of arm’s length negotiations at the time of hire, a portion of our Chief Operating Officer’s performance-based stock options vest in the event of a change in control of our Company. Specifically, if the conditions applicable to a performance-based stock option are satisfied, then the stock option will immediately vest with respect to 50% of the shares subject thereto and will thereafter vest in equal monthly installments over 24 months with respect to the remaining shares subject thereto, in each case, subject to our Chief Operating Officer’s continued employment with us through each applicable vesting date. We do not provide excise tax payments (or ‘‘gross-ups’’) relating to a change in control of our Company and have no such obligations in place with respect to any of our named executive officers. For detailed descriptions of the post-employment compensation arrangements we maintain with our named executive officers, as well as an estimate of the potential payments and benefits payable to our named executive officers under their post-employment compensation arrangements, see ‘‘Employment Agreements or Offer Letters with Named Executive Officers’’ and ‘‘Potential Payments Upon Termination or Change in Control’’ below. Other Compensation Policies and Practices Equity Awards Grant Policy Under our Amended and Restated Equity Award Grant Policy, we generally grant equity awards on a regularly scheduled basis to enhance the effectiveness of our internal control over our equity award grant process and to alleviate several of the burdens related to accounting for such equity awards, as follows: • Any grants of equity awards made in conjunction with the hiring of a new employee or the promotion of an existing employee will be made, if at all, regularly (either monthly or quarterly) and will be effective on the date such grant is approved by our board of directors or our compensation committee or such future date as is approved by our board of directors or our compensation committee. In no event will the effective date of an equity award made in conjunction with the hiring of a new employee precede the first date of employment. • Any grants of equity awards to existing employees (other than in connection with a promotion) will generally be made, if at all, on an annual or quarterly basis. Any such annual or quarterly grant will be effective on the date on which such grant is approved or such future date as is approved by our board of directors or our compensation committee. • All equity awards will be priced on the effective date of the award. The exercise price of all stock options will be equal to the closing market price on The New York Stock Exchange of one 41 P r o x y share of our Class A common stock on the effective date of grant, or, if no closing price is reported for such date, the closing price on the next immediately following date for which a closing price is reported. If the grant of restricted stock or of RSUs is denominated in dollars, the number of shares of restricted stock or RSUs that are granted will generally be calculated by dividing the dollar value of the approved award by the average closing market price on The New York Stock Exchange of one share of our Class A common stock over the trailing 30-day period ending on the last day of the month immediately prior to the month of the grant date, with such total number of shares to be granted per recipient rounded up to the nearest whole share. • Our board of directors or our compensation committee may delegate to a committee comprised of at least two of our executive officers all or part of the authority with respect to the granting of certain equity awards to employees (other than to such delegates), subject to certain limitations and requirements. Our board of directors and compensation committee have currently not delegated such authority. Policy Prohibiting Hedging and Pledging of Equity Securities Our Insider Trading Policy prohibits our employees, including our executive officers, and the non-employee members of our board of directors from engaging in any short sale and from buying or selling puts, calls, other derivative securities of our Company or any derivative securities that provide the economic equivalent of ownership of any of our Company’s securities or an opportunity, direct or indirect, to profit from any change in the value of our Company’s securities or engage in any other hedging transaction with respect to our Company’s securities, at any time. In addition, our Insider Trading Policy prohibits our employees, including our executive officers, and the non-employee members of our board of directors from using our Company’s securities as collateral in a margin account or from pledging our Company’s securities as collateral for a loan. Stock Ownership Policy To further align the interests of our executive officers with those of our stockholders and to promote a long-term perspective in managing our Company, in April 2018, we adopted a stock ownership policy for our Chief Executive Officer and executive officers subject to Section 16 of the Exchange Act (‘‘Section 16 Officers’’), including each of our named executive officers. Our stock ownership policy requires each named executive officer to acquire and hold the lesser of (i) a number of shares of our Company’s common stock equal in value to a multiple of such named executive officer’s annual base salary or (ii) 48,500 shares of our Company’s common stock for our Chief Executive Officer and 15,500 shares of our Company’s common stock for our other named executive officers, in each case, until he or she ceases to be our Chief Executive Officer or a Section 16 Officer, as applicable. The multiple for our Chief Executive Officer is four times his annual base salary and the multiple for our other named executive officers is one times his or her annual base salary. For purposes of our stock ownership policy, we only count directly and beneficially owned shares, including shares purchased through our Company’s ESPP or 401(k) Plan, if applicable, shares underlying vested RSUs that are held or deferred and shares underlying vested and unexercised in-the-money stock options. Each named executive officer has three years from the later of his or her designation as our Chief Executive Officer or Section 16 Officer, as applicable, or from the effective date of the policy to obtain the required ownership level. Tax and Accounting Considerations Deductibility of Executive Compensation Generally, Section 162(m) of the Code (‘‘Section 162(m)’’) disallows a federal income tax deduction for public corporations of remuneration in excess of $1 million paid in any fiscal year to 42 certain specified executive officers. For taxable years beginning before January 1, 2018 (i) these executive officers consisted of a public corporation’s chief executive officer and up to three other executive officers (other than the chief financial officer) whose compensation is required to be disclosed to stockholders under the Exchange Act because they are our most highly-compensated executive officers and (ii) qualifying ‘‘performance-based compensation’’ was not subject to this deduction limit if specified requirements are met. Pursuant to the Tax Cuts and Jobs Act of 2017, which was signed into law on December 22, 2017 (the ‘‘Tax Act’’), for taxable years beginning after December 31, 2017, the remuneration of a public corporation’s chief financial officer is also subject to the deduction limit. In addition, subject to certain transition rules (which apply to remuneration provided pursuant to written binding contracts which were in effect on November 2, 2017 and which are not subsequently modified in any material respect), for taxable years beginning after December 31, 2017, the exemption from the deduction limit for ‘‘performance-based compensation’’ is no longer available. Consequently, for fiscal years beginning after December 31, 2017, all remuneration in excess of $1 million paid to a specified executive will not be deductible. These changes will cause more of our compensation to be non-deductible under Section 162(m) in the future and will eliminate the Company’s ability to structure performance-based awards to be exempt from Section 162(m). In designing our executive compensation program and determining the compensation of our executive officers, including our named executive officers, our compensation committee considers a variety of factors, including the potential impact of the Section 162(m) deduction limit. However, our compensation committee will not necessarily limit executive compensation to that which is or may be deductible under Section 162(m). The deductibility of some types of compensation depends upon the timing of an executive officer’s vesting or exercise of previously granted rights. Further, interpretations of and changes in the tax laws, and other factors beyond our compensation committee’s control also affect the deductibility of compensation. Our compensation committee will consider various alternatives to preserving the deductibility of compensation payments and benefits to the extent consistent with its compensation goals and will continue to monitor developments under Section 162(m). To maintain flexibility to compensate our executive officers in a manner designed to promote our short-term and long-term corporate goals, our compensation committee has not adopted a policy that all compensation must be deductible. Our compensation committee believes that our stockholders’ interests are best served if its discretion and flexibility in awarding compensation is not restricted, even though some compensation awards may result in non-deductible compensation expense. 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 exceeds certain prescribed limits, and that the Company (or a successor) may forfeit a deduction on the amounts subject to this additional tax. We have not agreed to provide any executive officer, including any named executive officer, with a ‘‘gross-up’’ or other reimbursement payment for any tax liability that the executive officer might owe as a result of the application of Sections 280G or 4999 of the Code. Section 409A of the Internal Revenue Code Section 409A of the Code imposes additional significant taxes in the event that an executive officer, director or service provider receives ‘‘deferred compensation’’ that does not satisfy the requirements of Section 409A of the Code. Although we do not maintain a traditional nonqualified deferred compensation plan for our executive officers, Section 409A of the Code does apply to certain severance arrangements, bonus arrangements and equity awards, and we have structured all such arrangements and awards in a manner to either avoid or comply with the applicable requirements of Section 409A of the Code. For our non-employee directors, we provide a Non-Employee Directors’ Deferred Compensation Program, which has been structured to comply with the applicable requirements of Section 409A of the Code. 43 P r o x y Accounting for Stock-Based Compensation We follow the Financial Accounting Standard Board’s Accounting Standards Codification Topic 718 (‘‘FASB ASC Topic 718’’) for our stock-based compensation awards. FASB ASC Topic 718 requires us to measure the compensation expense for all share-based payment awards made to our employees and non-employee members of our board of directors, including options to purchase shares of our common stock and other stock awards, based on the grant date ‘‘fair value’’ of these awards. This calculation is performed for accounting purposes and reported in the executive compensation tables required by the federal securities laws, even though the recipient of the awards may never realize any value from such awards. Compensation Risk Assessment In consultation with management and Compensia, our compensation committee’s independent compensation consultant, in March 2018, our compensation committee assessed our compensation plans, policies and practices for named executive officers and other employees and concluded that they do not create risks that are reasonably likely to have a material adverse effect on our Company. This risk assessment included, among other things, a review of our cash and equity incentive-based compensation plans to ensure that they are aligned with our Company performance goals and overall target total direct compensation to ensure an appropriate balance between fixed and variable pay components. Our compensation committee conducts this assessment annually. Summary Compensation Table The following table provides information regarding the total compensation, for services rendered in all capacities, that was paid or earned by our named executive officers during the fiscal years ended December 31, 2015, December 31, 2016, and December 31, 2017. Name and principal position Year Salary ($) Bonus ($) Stock awards ($)(1) Option awards ($)(2) Jeff Lawson . . . . . . . . . . . . . 2017 133,700 2016 133,700 2015 299,783(4) Chief Executive Officer and Chairperson — 2,789,181 — 1,917,100 2,499,093 — — 1,897,644 15,000(5) Lee Kirkpatrick . . . . . . . . . . 2017 500,000 2016 380,000 2015 327,500(4) Chief Financial Officer — 1,617,719 — 882,875 15,000(5) 1,449,471 — — 873,915 Non- equity incentive All other compensation compensation ($) ($) Total ($) — — 41,125(6) — — 48,125(6) 204,427(3) — — 4,816(3) — — 5,626,401 2,050,800 2,253,552 3,572,006 1,262,875 1,264,540 George Hu(7) . . . . . . . . . . . . 2017 502,308 — 3,172,000 17,691,850 — 29,143(3) 21,395,301 Chief Operating Officer Karyn Smith . . . . . . . . . . . . 2017 400,000 2016 337,500 2015 293,750(4) General Counsel 125,000(8) 1,004,087 303,376 — 15,000(5) 899,667 — — 300,302 — — 43,750(6) 4,716(3) — — 2,433,470 640,876 652,802 (1) The amounts reported in this column represent the aggregate grant date fair value of the RSUs awarded to the named executive officers in the fiscal years ended December 31, 2015, December 31, 2016 and December 31, 2017, as applicable, calculated in accordance with FASB ASC Topic 718. Such aggregate grant date fair values do not take into account any estimated forfeitures related to service-vesting conditions. The valuation assumptions used in determining such amounts are described in the Notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the SEC on March 1, 2018. The amounts reflect the accounting cost for the RSUs and do not correspond to the actual economic value that may be received by the named executive officers upon vesting or settlement of the RSUs. 44 (2) The amounts reported in this column represent the aggregate grant date fair value of the stock options awarded to the named executive officer in the fiscal years ended December 31, 2015, December 31, 2016 and December 31, 2017, as applicable, calculated in accordance with FASB ASC Topic 718. Such aggregate grant date fair values do not take into account any estimated forfeitures related to service-vesting conditions. The valuation assumptions used in determining such amounts are described in the Notes to our Consolidated Financial Statements included our Annual Report on Form 10-K filed with the SEC on March 1, 2018. The amounts reported in this column reflect the accounting cost for these stock options and do not correspond to the actual economic value that may be received by the named executive officers upon exercise of the stock options or sale of the shares of common stock underlying such stock options. Mr. Hu’s 2017 amount includes the aggregate grant date fair value of his performance-based stock options, equal to an aggregate grant date fair value of $5,947,750, based upon the probable outcome of the applicable performance conditions, which is the maximum outcome. (3) For Mr. Lawson, consists of a reimbursement from the Company for a $125,000 HSR filing fee related to Mr. Lawson’s stock ownership and $75,256 for the related tax gross-up, $1,670 for supplemental long-term disability insurance premiums, as well as $2,500 for our Company’s matching contributions to his 401(k) account in 2017. For Mr. Hu, consists of a reimbursement from our Company for $25,000 for legal fees incurred in connection with the negotiation of his employment offer letter, $1,643 for supplemental long-term disability insurance premiums, as well as $2,500 for our Company’s matching contributions to his 401(k) account in 2017. For each of Mr. Kirkpatrick and Ms. Smith, consists of $2,500 for our Company’s matching contributions to his or her respective 401(k) account in 2017 as well as $2,316 and $2,216 for supplemental long-term disability insurance premiums for Mr. Kirkpatrick and Ms. Smith, respectively, in 2017. (4) Effective July 1, 2015, we terminated our 2015 Bonus Plan. In connection with the termination of the 2015 Bonus Plan, each of our named executive officers received an increase in annual base salary during the fiscal year ended December 31, 2015. Effective July 1, 2015, Mr. Lawson’s annual base salary increased from $235,000 to $480,000; however effective November 1, 2015, upon Mr. Lawson’s request, his annual base salary decreased to $133,700. Effective July 1, 2015, Mr. Kirkpatrick’s annual base salary increased from $275,000 to $380,000 and Ms. Smith’s annual base salary increased from $250,000 to $337,500. P r o x y (5) During the fiscal year ended December 31, 2015, each of our named executive officers for 2015 received a discretionary bonus equal to $15,000 in connection with the termination of our 2015 Bonus Plan. The discretionary bonus was paid to each of our named executive officers in the fiscal year ended December 31, 2016. (6) Amounts for Messrs. Lawson and Kirkpatrick and Ms. Smith were earned based on our achievement of certain performance goals, including total revenue, base revenue, gross margin and non-GAAP operating income, in accordance with our 2015 Bonus Plan. Since the 2015 Bonus Plan was terminated effective July 1, 2015, each of our named executive officers received a pro-rata portion of his or her 2015 bonus under the plan. (7) Mr. Hu joined our Company on February 28, 2017 and was therefore not a named executive officer for 2016 or 2015. Mr. Hu’s 2017 salary was pro-rated to his start date. (8) In June 2017, Ms. Smith received a special, one-time cash bonus in recognition of her services and contributions to us as our interim Chief People Officer during the period between May 2016 to June 2017. 45 Grants of Plan-Based Awards Table The following table sets forth certain information with respect to all plan-based awards granted to the named executive officers during the fiscal year ending December 31, 2017. Name Jeff Lawson . . . Lee Kirkpatrick . George Hu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Karyn Smith . . . . . . . . . . . . Type of Award Grant Date . Time-Based Stock Option . Time-Based Stock Option . Time-Based Stock Option Time-Based RSUs Time-Based RSUs 2/10/2017 2/10/2017 2/10/2017 2/10/2017 2/28/2017 Performance-Based Stock Option 2/28/2017 Performance-Based Stock Option 2/28/2017 Performance-Based Stock Option 2/28/2017 2/28/2017 Time-Based RSUs 2/10/2017 2/10/2017 Time-Based RSUs . Time-Based Stock Option Estimated Future Payouts Under Equity Incentive Plan Awards(1) Threshold Target Maximum Stock or Units (#) ($) ($) ($) All Other Option Awards: Number of Securities All Other Exercise Stock or Base Grant Date Awards: Fair Value Number of Price of of Option Shares of Underlying Option Awards Awards ($)(2) ($/sh) Options (#) — — — — — — — — — — — — — — — — — — — — — 185,000(5) — 185,000(5) — 185,000(5) — — — — — — — — 87,271(4) — 50,617(4) — — — — 100,000(4) — 31,417(4) 163,890(3) — 95,056(3) — 900,000(3) — — — — 59,000(3) — 31.96 — 31.96 — 31.72 31.72 31.72 31.72 — 31.96 — 2,499,093 2,789,181 1,449,471 1,617,719 11,744,100 2,493,800 1,898,100 1,555,850 3,172,000 899,667 1,004,087 (1) (2) (3) (4) (5) The performance-based stock options do not have a ‘‘Threshold’’ or ‘‘Maximum’’. The ‘‘Target’’ column reflects the number of performance-based stock options that may vest assuming all performance conditions are achieved. The amounts reported in this column represent the aggregate grant date fair value of the RSUs and stock options, as applicable, awarded to the named executive officer in the fiscal year ended December 31, 2017, calculated in accordance with FASB ASC Topic 718. Such aggregate grant date fair values do not take into account any estimated forfeitures related to service-vesting conditions. The valuation assumptions used in determining such amounts are described in the Notes to our Consolidated Financial Statements included our Annual Report on Form 10-K filed with the SEC on March 1, 2018. The amounts reported in this column reflect the accounting cost for these RSUs and stock options, as applicable, and do not correspond to the actual economic value that may be received by the named executive officers upon the vesting or settlement of the RSUs or the exercise of the stock options or sale of the shares of common stock underlying such stock options, as applicable. Mr. Hu’s 2017 amount includes the aggregate grant date fair value of his performance-based stock options, equal to an aggregate grant date fair value of $5,947,750, based upon the probable outcome of the applicable performance conditions, which is the maximum outcome. The stock option is subject to time-based vesting, as described in the footnotes to the ‘‘Outstanding Equity Awards at Fiscal Year-End Table’’ below. The RSUs are subject to time-based vesting, as described in the footnotes to the ‘‘Outstanding Equity Awards at Fiscal Year-End Table’’ below. The stock option is subject to performance-based vesting, as described in the footnotes to the ‘‘Outstanding Equity Awards at Fiscal Year-End Table’’ below. 46 Outstanding Equity Awards at Fiscal Year-End Table The following table sets forth information regarding outstanding equity awards held by our named executive officers as of December 31, 2017. Except as described below, all stock options and RSUs are subject to certain vesting acceleration provisions as provided in our Amended and Restated Executive Severance Plan (and for our Chief Operating Officer, in such plan as well as his employment offer letter). Option Awards(1)(2) Stock Awards(1)(2) Number of securities underlying unexercised options (#) exercisable 316,667(5) — — — 387,076(9) 175,000(10) — — — — — — 198,952(15) 36,069(16) — — — Number of securities underlying unexercised options (#) unexercisable — 163,890(6) — — — — 95,056(6) — — 900,000(12) — — — — 59,000(6) — — Equity incentive plan awards: number of securities underlying unexercised unearned options (#) — — — — — — — — — — 555,000(13) — — — — — — Option exercise price ($)(3) Option expiration date Number of shares or units of stock that have not vested (#) 10.09 31.96 — — 1.24 10.09 31.96 — — 31.72 31.72 — 4.73 10.09 31.96 — — 12/30/2025 2/9/2027 — — — 106,875(7) 87,271(8) — — 05/16/2022 — 12/30/2025 2/9/2027 — 43,750(11) — 50,617(8) — — 2/27/2027 — 2/27/2024 — 100,000(14) 10/28/2024 12/30/2025 2/9/2027 — — — — — 16,913(7) 31,417(8) Market value of shares or units of stock that have not vested ($)(4) — — $2,522,250 $2,059,596 — — — $1,032,500 $1,194,561 — — $2,360,000 — — — $ 399,147 $ 741,441 P r o x y Name Grant date Jeff Lawson . . . Chief Executive Officer and Chairperson . . . . . . Lee Kirkpatrick . . Chief Financial Officer . . . George Hu . . . Chief Operating Officer . . . . . . . . . Karyn Smith . . General Counsel . . . . . . . . . 12/31/2015 2/10/2017 2/4/2016 2/10/2017 5/17/2012 12/31/2015 2/10/2017 2/4/2016 2/10/2017 2/28/2017 2/28/2017 2/28/2017 . 10/29/2014 12/31/2015 2/10/2017 2/4/2016 2/10/2017 . (1) Equity awards granted prior to June 21, 2016 were granted pursuant to our 2008 Stock Option Plan (as amended and restated, the ‘‘2008 Plan’’). Each stock option under the 2008 Plan is immediately exercisable. To the extent a named executive officer exercises his or her 2008 Plan stock options prior to vesting, the shares of our common stock that he or she will receive will be unvested and subject to the Company’s right of repurchase, which will lapse in accordance with the original vesting schedule of the stock option. No named executive officer has early exercised his or her stock options. (2) Unless otherwise described in the footnotes below, the vesting of each equity award on a vesting date is subject to the applicable named executive officer’s continued employment with the Company through such vesting date. (3) (4) (5) (6) (7) (8) (9) This column represents the fair market value of a share of our common stock on the date of the grant, as determined by the administrator of our 2008 Plan or 2016 Plan, as applicable. This column represents the market value of the shares underlying the RSUs as of December 31, 2017, based on the closing price of our Class A common stock, as reported on The New York Stock Exchange, of $23.60 per share on December 29, 2017 (the last trading day of 2017). These values assume that the fair market value of the Class B common stock underlying certain of the RSUs, which is not listed or approved for trading on or with any securities exchange or association, is equal to the fair market value of our Class A common stock. The shares subject to the stock option vest in equal monthly installments over 48 months following January 15, 2016. The shares subject to the stock option vest as follows: 1/4th of the shares vested on January 1, 2018 and 1/48th of the shares vest monthly thereafter. The RSUs vest in sixteen equal quarterly installments following January 15, 2016. The RSUs vest as follows: 13/48 of the RSUs vested on February 15, 2018, after which 1/16 of the RSUs vest quarterly for the next 11 quarters, with 1/24 of the RSUs vesting in the next quarter thereafter. The shares subject to the stock option vest as follows: 25% of the shares vested on May 7, 2013 and 1/48th of the shares vest on the seventh day of each month thereafter. (10) The shares subject to the stock option vest in equal monthly installments over 34 months following June 15, 2016. (11) The RSUs vest in twelve equal quarterly installments following June 15, 2016. (12) The shares subject to the stock option vest as follows: 25% of the shares vested on February 28, 2018 and the remaining shares vest in equal monthly installments over the following three years. (13) Consists of three performance-based stock options, each to purchase 185,000 shares of our Class A common stock. 50% of the shares subject to each stock option will vest if a certain pre-established target level tied to the Company’s revenue is achieved by a certain specified date. The remaining 50% of the shares subject to each stock option will thereafter vest in 24 equal monthly installments. If the Company’s revenue 47 target for the applicable performance-based stock option is not achieved by the applicable date, then the 185,000 shares subject to the stock option will be forfeited at such time. (14) The RSUs vest as follows: 25% of the RSUs vested on February 28, 2018 and the remaining RSUs vest in equal quarterly installments over the following three years, in each case on May 15, August 15, November 15 and February 15. (15) The shares subject to the stock option vest as follows: 25% of the shares vested on September 2, 2015 and 1/48th of the shares vest on the second day of each month thereafter. (16) The shares subject to the stock option vest in equal monthly installments over 48 months following January 15, 2016. In February 2018, our compensation committee approved the grant of a stock option to purchase shares of our Class A common stock and a grant of RSUs to each of our named executive officers. Such stock options and RSUs are subject to time-based vesting conditions and full acceleration of vesting only upon both a change in control of the Company plus a qualifying termination of employment in accordance with our Amended and Restated Executive Severance Plan. Option Exercises and Stock Vested Table The following table presents, for each of the named executive officers, the shares of our common stock that were acquired upon the exercise of stock options and vesting of RSUs and the related value realized during the fiscal year ending December 31, 2017. Name Jeff Lawson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lee Kirkpatrick . . . . . . . . . . . . . . . . . . . . . . . . . . . . . George Hu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Karyn Smith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Option Awards Stock Awards Number of Shares Acquired on Exercise (#) — 129,449 — 32,202 Value Realized on Exercise ($)(1)(2) Number of Shares Acquired on Vesting (#) — 47,500 29,167 — 7,517 3,608,441 — 693,984 Value Realized on Vesting ($)(1)(3) 1,425,713 825,575 — 225,622 (1) These values assume that the fair market value of the Class B common stock underlying certain of the stock options and RSUs, which is not listed or approved for trading on or with any securities exchange or association, is equal to the fair market value of our Class A common stock. Each share of Class B common stock is convertible into one share of Class A Common Stock at any time at the option of the holder or upon certain transfers of such shares. (2) The aggregate value realized upon the exercise of a stock option represents the difference between the aggregate market price of the shares of our Class A common stock or Class B common stock (which is assumed to be equal to our Class A common stock as described in footnote (1) above), as applicable, on the date of exercise and the aggregate exercise price of the stock option. (3) The aggregate value realized upon the vesting and settlement of the RSUs represents the aggregate market price of the shares of our Class A common stock or Class B common stock (which is assumed to be equal to our Class A common stock as described in footnote (1) above), as applicable, on the date of settlement. Employment Agreements or Offer Letters with Named Executive Officers Prior to our initial public offering, we initially entered into employment offer letters with each of our named executive officers, except for our Chief Executive Officer, in connection with his or her employment with us, which set forth the terms and conditions of employment of each individual, including his or her initial base salary, initial target annual bonus opportunity and standard employee benefit plan participation. In addition, these employment offer letters provided for certain payments and benefits in the event of an involuntary termination of employment following a change in control of 48 the Company. In connection with our initial public offering, we adopted an executive severance plan, which was subsequently amended and restated (i.e., the Amended and Restated Executive Severance Plan), in order to provide more standardized severance benefits to our named executive officers and to supersede and replace any existing severance arrangements with benefits that were aligned with our peer group practices. For named executive officers hired after our initial public offering, we did not provide for any severance or change in control payments or benefits in their employment offer letters (except for limited vesting acceleration provisions in our Chief Operating Officer’s employment offer letter). Each of our named executive officers, including our Chief Executive Officer and Chief Operating Officer, is a participant in the Amended and Restated Executive Severance Plan, as further described below. The Amended and Restated Executive Severance Plan provides for certain payments and benefits in the event of a termination of employment, including an involuntary termination of employment in connection with a change in control of the Company, and replaced the severance provisions in our named executive officers’ employment offer letters and award agreements, if any, entered into prior to our initial public offering. Jeff Lawson We have not entered into an employment offer letter or employment agreement with Mr. Lawson. Lee Kirkpatrick On April 24, 2012, we entered into an employment offer letter with Mr. Kirkpatrick, who currently serves as our Chief Financial Officer. The employment offer letter provided for Mr. Kirkpatrick’s at-will employment and set forth his initial annual base salary, target bonus and an initial option grant, as well as his eligibility to participate in our benefit plans generally. Mr. Kirkpatrick is subject to our standard employment, confidential information, invention assignment and arbitration agreement. P r o x y On February 13, 2018, we announced that Mr. Kirkpatrick had informed us and our board of directors of his decision to retire from the Company. To ensure an orderly transition and continuity of operations, Mr. Kirkpatrick is expected to continue to serve as Chief Financial Officer until his successor is found and has moved into the role. The search process has begun and is expected to be completed before the end of the fiscal year. George Hu On February 28, 2017, we entered into an employment offer letter with Mr. Hu, who currently serves as our Chief Operating Officer. The employment offer letter provided for Mr. Hu’s at-will employment and set forth his initial annual base salary and initial stock option and RSU grants, as well as his eligibility to participate in our benefit plans generally. Details regarding Mr. Hu’s initial stock option and RSU grants are described above in the section titled ‘‘Executive Summary—Executive Compensation Highlights—Appointment of Chief Operating Officer’’ above. Pursuant to the employment offer letter, we also agreed to provide Mr. Hu with reimbursements for his legal fees in connection with the negotiation of such employment offer letter, up to a maximum aggregate amount of $25,000. Mr. Hu is subject to our standard employment, confidential information, invention assignment and arbitration agreement. The equity award agreements for Mr. Hu’s time-based stock option and time-based RSUs provide that if his employment is terminated by us for any reason other than for ‘‘cause’’ (as such term is defined in his employment offer letter), death or disability or he resigns for ‘‘good reason’’ (as such term is defined in his employment offer letter) (each, a ‘‘Termination Event’’), in either case, within the first two years of his employment with us, then, subject to his delivery of an effective release of claims in our favor, the vesting of such awards will be accelerated to the extent necessary to cause 50% of the 49 original number of shares subject to each such award to be vested on the date of such termination of employment. The stock option agreements for Mr. Hu’s performance-based stock options provide that if a Termination Event occurs within the first two years of his employment with us, then, subject to his delivery of an effective release of claims in our favor, the vesting of such stock options will be accelerated to the extent that the applicable Company revenue targets are within a certain percentage of attainment as of the end of the quarter in which such termination occurs. Upon a ‘‘Sale Event’’ (as such term is defined in the 2016 Plan), the applicable performance condition will be deemed met with respect to any outstanding performance-based stock options, such that 50% of the shares subject thereto will vest and the other 50% of the shares subject thereto will be subject to time-based vesting in 24 equal monthly installments thereafter, subject to Mr. Hu’s continued employment with the Company or its successor through each applicable vesting date. Karyn Smith On July 30, 2014, we entered into an employment offer letter with Ms. Smith, who currently serves as our General Counsel. The employment offer letter provided for Ms. Smith’s at-will employment and set forth her initial annual base salary, target bonus and an initial option grant, as well as her eligibility to participate in our benefit plans generally. Ms. Smith is subject to our standard employment, confidential information, invention assignment and arbitration agreement. Potential Payments Upon Termination or Change in Control Amended and Restated Executive Severance Plan The Amended and Restated Executive Severance Plan provides that upon a termination of employment by us for any reason other than for ‘‘cause’’ (as defined in the Amended and Restated Executive Severance Plan except that for our Chief Operating Officer, ‘‘cause’’ will be as defined in his employment offer letter), death or disability, in each case, outside of the change in control period (i.e., the period beginning three months prior to and ending 12 months after, a ‘‘change in control,’’ as defined in the Amended and Restated Executive Severance Plan), an eligible participant will be entitled to receive, subject to the execution and delivery of an effective release of claims in favor of the Company, (i) a lump sum cash payment equal to nine months of base salary for our Chief Executive Officer, and six months of base salary for our other named executive officers, and (ii) a monthly cash payment equal to our contribution towards COBRA health insurance for up to nine months for our Chief Executive Officer and up to six months for our other named executive officers. The Amended and Restated Executive Severance Plan also provides that upon a (i) termination of employment by us other due to cause, death or disability or (ii) a resignation of employment for ‘‘good reason’’ (as defined in the Amended and Restated Executive Severance Plan except that for our Chief Operating Officer, ‘‘good reason’’ will be as defined in his employment offer letter), in each case, within the change in control period, an eligible participant will be entitled to receive, in lieu of the payments and benefits above and subject to the execution and delivery of an effective release of claims in favor of the Company, (1) a lump sum cash payment equal to 18 months of base salary for our Chief Executive Officer and 12 months of base salary for our other named executive officers, (2) a monthly cash payment equal to our contribution towards COBRA health insurance for up to 18 months for our Chief Executive Officer and up to 12 months for our other named executive officers and (3) full accelerated vesting of all outstanding and unvested equity awards held by our named executive officers; provided, that the performance conditions applicable to any stock-based awards subject to performance conditions will be deemed satisfied at the target level specified in the terms of the applicable award agreement. 50 The payments and benefits provided under the Amended and Restated Executive Severance Plan in connection with a change in control may not be eligible for a federal income tax deduction by us pursuant to Section 280G of the Code. These payments and benefits may also subject an eligible participant, including the named executive officers, to an excise tax under Section 4999 of the Code. If the payments or benefits payable to an eligible participant in connection with a change in control would be subject to the excise tax imposed under Section 4999 of the Code, then those payments or benefits will be reduced if such reduction would result in a higher net after-tax benefit to him or her. Other Change in Control and Severance Arrangements In addition to participation in the Amended and Restated Executive Severance Plan, Mr. Hu’s equity awards are also subject to certain acceleration of vesting provisions, as described in ‘‘Employment Agreements or Offer Letters with Named Executive Officers—George Hu’’ above. The following table presents information concerning estimated payments and benefits that would be provided in the circumstances described above for each of the named executive officers serving as of the end of the fiscal year ending December 31, 2017. The payments and benefits set forth below are estimated assuming that the termination or change in control event occurred on the last business day of our fiscal year ending December 31, 2017. Actual payments and benefits could be different if such events were to occur on any other date or at any other price or if any other assumptions are used to estimate potential payments and benefits. Qualifying Termination Not in Connection with a Change in Control(1) Continued Benefits ($) Equity Acceleration ($)(3) Cash Severance ($) Total ($) Name Qualifying Termination in Connection with a Change in Control(2) Continued Benefits ($) Equity Acceleration ($)(3)(4) Cash Severance ($) Total ($) P r o x y Jeff Lawson . . . . . Lee Kirkpatrick . . George Hu(14) . . . Karyn Smith . . . . 100,275(5) 250,000(9) 300,000(9) 200,000(9) 14,090(6) 7,574(10) 9,393(10) 5,609(10) — — 1,180,000(13) — 114,365 257,574 1,489,393 205,609 200,550(7) 500,000(11) 600,000(11) 400,000(11) 28,179(8) 15,148(12) 18,786(12) 11,217(12) 7,255,704 3,339,664 2,360,000 2,411,941 7,484,433 3,854,812 2,978,786 2,823,158 (1) A ‘‘qualifying termination’’ means a termination other than due to cause, death or disability and ‘‘not in connection with a change in control’’ means outside of the change in control period. (2) A ‘‘qualifying termination’’ means a termination other than due to cause, death or disability or a resignation for good reason and ‘‘in connection with a change in control’’ means within the change in control period. (3) Represents the market value of the shares underlying the stock options and RSUs as of December 31, 2017, based on the closing price of our Class A common stock, as reported on The New York Stock Exchange, of $23.60 on December 29, 2017 (the last trading day of 2017). These values assume that the fair market value of the Class B common stock underlying certain of the stock options and RSUs, which is not listed or approved for trading on or with any securities exchange or association, is equal to the fair market value of our Class A common stock. Each share of Class B common stock is convertible into one share of Class A common stock at any time at the option of the holder or upon certain transfers of such shares. (4) Represents acceleration of vesting of 100% of the total number of shares underlying outstanding and unvested stock options and RSUs. Because the per share exercise price of certain stock options granted in 2017 was greater than the fair market value of a share of our Class A common stock on December 29, 2017 ($23.60) (the last trading day of 2017), no amounts have been included with respect to such stock options. (5) Represents nine months of our Chief Executive Officer’s annual base salary. (6) Represents nine months of our contribution towards COBRA health insurance, based on our actual costs to provide health insurance to our Chief Executive Officer immediately prior to termination. (7) Represents 18 months of our Chief Executive Officer’s annual base salary. (8) Represents 18 months of our contribution towards COBRA health insurance, based on our actual costs to provide health insurance to our Chief Executive Officer immediately prior to termination. (9) Represents six months of the applicable named executive officer’s annual base salary. (10) Represents six months of our contribution towards COBRA health insurance, based on our actual costs to provide health insurance to the applicable named executive officer immediately prior to termination. 51 (11) Represents 12 months of the applicable named executive officer’s annual base salary. (12) Represents 12 months of our contribution towards COBRA health insurance, based on our actual costs to provide health insurance to the applicable named executive officer immediately prior to termination. (13) Assumes the occurrence of a Termination Event in accordance with Mr. Hu’s employment offer letter and represents acceleration of vesting as of December 31, 2017 of the following: (i) 50% of the total number of shares underlying Mr. Hu’s time-based stock options and time-based RSUs outstanding as of December 31, 2017 and (ii) 100% of one of Mr. Hu’s three performance-based stock options, since Mr. Hu was within a certain percentage of attaining the applicable performance condition for such stock option as of the end of the quarter in which such termination occurs. Because the per share exercise price of Mr. Hu’s time-based and performance-based stock options was greater than the fair market value of a share of our Class A common stock as of December 29, 2017 ($23.60) (the last trading day of 2017), no amount has been included with respect to such stock options. (14) Pursuant to Mr. Hu’s employment offer letter, in the event of a ‘‘Sale Event’’ (as such term is defined in the 2016 Plan) while Mr. Hu is still employed by us, the performance conditions under his performance-based stock options will be deemed met with respect to any outstanding performance-based stock options and will result in acceleration of vesting of 50% of the underlying shares, with the remaining 50% of the shares subject to time-based vesting in 24 equal monthly installments thereafter, subject to Mr. Hu’s continued employment with the Company or its successor through each applicable vesting date. Because the per share exercise price of Mr. Hu’s performance-based stock options was greater than the fair market value of a share of our common stock on December 29, 2017 ($23.60) (the last trading day of 2017), assuming the occurrence of a ‘‘Sale Event’’ (as such term is defined in the 2016 Plan), the value of the acceleration of vesting of 50% of the shares subject to such performance-based stock option would have been $0 as of December 31, 2017. COMPENSATION COMMITTEE REPORT Our compensation committee has reviewed and discussed the section titled ‘‘Compensation Discussion and Analysis’’ with management. Based on such review and discussion, our compensation committee has recommended to the board of directors that the section titled ‘‘Compensation Discussion and Analysis’’ be included in this proxy statement. Respectfully submitted by the members of our compensation committee of the board of directors: Compensation Committee Elena Donio (Chair) James McGeever Erika Rottenberg 52 EQUITY COMPENSATION PLAN INFORMATION The following table provides information as of December 31, 2017 with respect to the shares of our common stock that may be issued under our existing equity compensation plans. Plan Category Equity compensation plans approved by stockholders(1) . . . . . . . . . . . . . . . . . . . . . . . Equity compensation plans not approved by stockholders . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (b) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) 10,710,427(2) $11.4167(3) 12,678,532(4) — 10,710,427 — $11.4167 — 12,678,532 P r o x y (1) Includes the following plans: our 2008 Plan, 2016 Plan, and our ESPP. (2) Excludes 5,665,459 shares that may be issued under RSUs as of December 31, 2017. (3) Excludes 5,665,459 shares that may be issued under RSUs as of December 31, 2017 since such shares subject to RSU awards have no exercise price. (4) As of December 31, 2017, a total of 15,862,427 shares of our Class A common stock were reserved for issuance pursuant to the 2016 Plan, which number excludes the 4,698,490 shares that were added to the 2016 Plan as a result of the automatic annual increase on January 1, 2018. The 2016 Plan provides that the number of shares reserved and available for issuance under the 2016 Plan will automatically increase each January 1, beginning on January 1, 2017, by 5% of the outstanding number of shares of our Class A and Class B common stock on the immediately preceding December 31 or such lesser number of shares as determined by our compensation committee. This number will be subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. The shares of Class A and Class B common stock underlying any awards that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by us prior to vesting, satisfied without the issuance of stock, expire or are otherwise terminated, other than by exercise, under the 2016 Plan and the 2008 Plan will be added back to the shares of Class A common stock available for issuance under the 2016 Plan (provided, that any such shares of Class B common stock will first be converted into shares of Class A common stock). The Company no longer makes grants under the 2008 Plan. As of December 31, 2017, a total of 2,478,343 shares of our Class A common stock were available for future issuance pursuant to the ESPP, which number includes shares subject to purchase during the current purchase period, which commenced on November 16, 2017 (the exact number of which will not be known until the purchase date on May 15, 2018) but excludes the 939,698 shares that were added to the ESPP as a result of the automatic annual increase on January 1, 2018. Subject to the number of shares remaining in the share reserve, the maximum number of shares purchasable by any participant on any one purchase date for any purchase period, including the current purchase period may not exceed 5,000 shares. The ESPP provides that the number of shares reserved and available for issuance under the ESPP will automatically increase each January 1, beginning on January 1, 2017, by the lesser of 1,800,000 shares of our Class A common stock, 1% of the outstanding number of shares of our Class A and Class B common stock on the immediately preceding December 31 or such lesser number of shares as determined by our compensation committee. This number will be subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. 53 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information available to us with respect to the beneficial ownership of our capital stock as of March 31, 2018, for: • each of our named executive officers; • each of our directors; • all of our current directors and executive officers as a group; and • each person known by us to be the beneficial owner of more than 5% of the outstanding shares of our Class A or Class B common stock. We have determined beneficial ownership in accordance with the rules of the SEC, and thus it represents sole or shared voting or investment power with respect to our securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares that they beneficially owned, subject to community property laws where applicable. We have based our calculation of percentage ownership of our common stock on 71,748,415 shares of our Class A common stock and 23,943,253 shares of our Class B common stock outstanding on March 31, 2018. We have deemed shares of our capital stock subject to stock options that are currently exercisable or exercisable within 60 days of March 31, 2018 to be outstanding and to be beneficially owned by the person holding the stock option for the purpose of computing the percentage ownership of that person. We have deemed shares of our capital stock subject to RSUs for which the service condition has been satisfied or would be satisfied within 60 days of March 31, 2018 to be outstanding and to be beneficially owned by the person holding the RSUs for the purpose of computing the percentage ownership of that person. However, we did not deem these shares subject to stock options or RSUs outstanding for the purpose of computing the percentage ownership of any other person. 54 Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o Twilio Inc., 375 Beale Street, Suite 300, San Francisco, California 94105. Name of Beneficial Owner Shares % Shares % Voting %† Ownership % Shares Beneficially Owned Class A Class B Named Executive Officers and Directors: Jeff Lawson(1) . . . . . . . . . . . . . . . . . . . . . Lee Kirkpatrick(2) . . . . . . . . . . . . . . . . . . George Hu(3) . . . . . . . . . . . . . . . . . . . . . Karyn Smith(4) . . . . . . . . . . . . . . . . . . . . Richard Dalzell(5) . . . . . . . . . . . . . . . . . . Byron Deeter(6) . . . . . . . . . . . . . . . . . . . . Elena Donio(7) . . . . . . . . . . . . . . . . . . . . Jeff Epstein(8) . . . . . . . . . . . . . . . . . . . . . James McGeever(9) . . . . . . . . . . . . . . . . . Erika Rottenberg(10) . . . . . . . . . . . . . . . . All executive officers and directors as a group (10 persons)(11): . . . . . . . . . . . . . 5% Stockholders: Bessemer Venture Partners and Related Entities(12) . . . . . . . . . . . . . . . . . . . . . . Entities affiliated with Fidelity(13) . . . . . . . The Vanguard Group(14) . . . . . . . . . . . . . BlackRock, Inc.(15) . . . . . . . . . . . . . . . . . . The Bank of New York Mellon(16) . . . . . . John Wolthuis(17) . . . . . . . . . . . . . . . . . . . 194,450 145,633 284,786 29,813 230,142 * * * * — — * — — * * — — 13,486 10,000 7,506,069 500,603 211,062 120,000 9,253,955 22,262 30.9 2.0 — — * * 38.6 * — — 1.7 * 412,883 15,163 23.9 1.6 * * * 29.8 * * 1.3 * 8.0 * * * * 9.9 * * * * 908,310 1.3 18,041,997 71.9 56.1 19.5 — — 9,253,955 6,477,055 5,445,927 4,091,535 3,900,747 9.0 7.6 5.7 5.4 — — 2,238,474 38.6 — — — — — — — — 9.3 29.7 2.1 1.8 1.3 1.3 7.2 9.7 6.8 5.7 4.3 4.1 2.3 P r o x y * Represents beneficial ownership of less than one percent (1%) of the outstanding shares. † Percentage of total voting power represents voting power with respect to all shares of our Class A common stock and Class B common stock, as a single class. The holders of our Class A common stock are entitled to one vote per share, and holders of our Class B common stock are entitled to ten votes per share. (1) Consists of (i) 115,281 shares of Class A common stock held of record by Mr. Lawson, as trustee of the Lawson Revocable Trust, (ii) 6,113,993 shares of Class B common stock held of record by Mr. Lawson, as trustee of the Lawson Revocable Trust, (iii) 323,170 shares of Class B common stock held of record by The Lawson 2014 Irrevocable Trust, J.P. Morgan Trust Company, as trustee, (iv) 740,364 shares of Class B common stock held of record by Mr. Lawson, as trustee of the Lawson 2014 GRAT, (v) 67,353 shares of Class A common stock subject to outstanding options that are exercisable within 60 days of March 31, 2018, (vi) 316,667 shares of Class B common stock subject to outstanding options that are exercisable within 60 days of March 31, 2018, (vii) 11,816 shares of Class A common stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2018 and (viii)11,875 shares of Class B common stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2018. (2) Consists of (i) 110,785 shares of Class A common stock held of record by Mr. Kirkpatrick as Trustee of the Kirkpatrick Family Trust, (ii) 31,685 shares of Class A common stock subject to outstanding options that are exercisable within 60 days of March 31, 2018, (iii) 500,603 shares of Class B common stock subject to outstanding options that are exercisable within 60 days of 55 March 31, 2018 and (iv) 3,163 shares of Class A common stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2018. (3) Consists of (i) 1,004 shares of Class A common stock held of record by Mr. Hu, (ii) 268,513 shares of Class A common stock subject to outstanding options that are exercisable within 60 days of March 31, 2018, (iii) 15,269 shares of Class A common stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2018. (4) Consists of (i) 2,412 shares of Class A common stock held of record by Ms. Smith, (ii) 1,172 shares of Class B common stock held of record by Ms. Smith, as trustee of The Karyn Smith Revocable Trust u/a/d 9/15/06, amended 12/23/11, (iii) 23,514 shares of Class A common stock subject to outstanding options that are exercisable within 60 days of March 31, 2018, (iv) 208,011 shares of Class B common stock subject to outstanding options that are exercisable within 60 days of March 31, 2018, (v) 3,887 shares of Class A common stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2018 and (vi) 1,879 shares of Class B common stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2018. (5) Consists of 120,000 shares of Class B common stock subject to outstanding options that are exercisable by Mr. Dalzell within 60 days of March 31, 2018. (6) Consists of (i) 230,142 shares of Class A common stock held by Byron B. Deeter and Allison K. Deeter Trustees UTD July 28, 2000 and (ii) shares held by the BVP entities identified in footnote 12. Byron B. Deeter, one of our directors, Robert P. Goodman, Jeremy S. Levine, J. Edmund Colloton, David J. Cowan and Robert M. Stavis are the directors of Deer VII & Co. Ltd. (‘‘Deer VII Ltd.’’) and hold the voting and dispositive power for the BVP Entities identified in footnote 12. Investment and voting decisions with respect to the shares held by the BVP entities are made by the directors of Deer VII Ltd. acting as an investment committee. Mr. Deeter, a member of our board of directors, disclaims beneficial ownership of such shares held by the BVP Entities except to the extent of his pecuniary interest in such shares. (7) Consists of (i) 19,772 shares of Class B common stock held of record by Ms. Donio and (ii) 2,490 shares of Class B common stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2018. (8) Consists of 13,486 shares of Class A common stock held of record by Mr. Epstein. (9) Consists of (i) 10,000 shares of Class A common stock held of record my Mr. McGeever, as trustee of the James and Linda McGeever Revocable Trust, (ii) 199,470 shares of Class B common stock held of record by Mr. McGeever and (ii) 213,413 shares of Class B common stock held of record by The James and Linda McGeever Revocable Trust. (10) Consists of (i) 12,978 shares of Class B common stock held of record by Ms. Rottenberg and (ii) 2,185 shares of Class B common stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2018. (11) Consists of: (i) 483,110 shares of Class A common stock held of record, (ii) 16,878,287 shares of Class B common stock held of record, (iii) 391,065 shares of Class A common stock subject to outstanding stock options that are exercisable within 60 days of March 31, 2018, (iv) 1,145,281 shares of Class B common stock subject to outstanding stock options that are exercisable within 60 days of March 31, 2018, (v) 34,135 shares of Class A common stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2018 and (vi) 18,429 shares of Class B common stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2018. (12) Consists of (i) 1,270,372 shares of Class B common stock held of record by Bessemer Venture Partners VII Institutional L.P., (ii) 4,900,009 shares of Class B common stock held of record by BVP VII Special Opportunity Fund L.P., (iii) 2,903,707 shares of Class B common stock held of 56 record by Bessemer Venture Partners VII L.P. and (iv) 179,867 shares of Class B Common stock held of record by 15 Angels LLC, a wholly owned subsidiary of Bessemer Venture Partners VII Institutional L.P. (collectively, the ‘‘BVP Entities’’). Each of Deer VII & Co. L.P. (‘‘Deer VII L.P’’), the general partner of the BVP Entities, and Deer VII & Co. Ltd. (‘‘Deer VII Ltd.’’), the general partner of Deer VII L.P., has voting and dispositive power over the shares held by the BVP Entities. J. Edmund Colloton, David J. Cowan, Byron B. Deeter, Robert P. Goodman, Jeremy S. Levine and Robert M. Stavis are the directors of Deer VII Ltd. Investment and voting decisions with respect to the shares held by the BVP Entities are made by the directors of Deer VII Ltd. acting as an investment committee. The address for each of these entities is c/o Bessemer Venture Partners, 1865 Palmer Avenue, Suite 104, Larchmont, New York 10538. (13) Based on information reported by FMR LLC on Schedule 13G filed with the SEC on January 10, 2018. Of the shares of Class A common stock beneficially owned, FMR LLC reported that it has sole dispositive power with respect to 6,477,055 shares and sole voting power with respect to 121,110 shares. FMR LLC listed its address as 245 Summer Street, Boston, Massachusetts 02210. (14) Based on information reported by The Vanguard Group on Schedule 13G filed with the SEC on February 9, 2018. Of the shares of Class A common stock beneficially owned, The Vanguard Group reported that it has sole dispositive power with respect to 5,313,201 shares, shared dispositive power with respect to 132,726 shares, sole voting power with respect to 122,957 shares and shared voting power with respect to 14,600 shares. The Vanguard Group listed their address as 100 Vanguard Boulevard, Malvern, Pennsylvania 19355. (15) Based on information reported by BlackRock, Inc. on Schedule 13G filed with the SEC on February 1, 2018. Of the shares of Class A common stock beneficially owned, BlackRock, Inc. reported that it has sole dispositive power with respect to 4,091,535 shares and sole voting power with respect to 3,969,655 shares. BlackRock, Inc. listed their address as 55 East 52nd Street, New York, New York 10055. (16) Based on information reported by The Bank of New York Mellon on Schedule 13G filed with the SEC on February 7, 2018. Of the shares of Class A common stock beneficially owned, The Bank of New York Mellon reported that it has sole dispositive power with respect to 3,870,047 shares, shared dispositive power with respect to 30,700 shares, sole voting power with respect to 3,697,977 shares and shared voting power with respect to 26,950 shares. The Bank of New York Mellon listed their address as 225 Liberty Street, New York, New York 10286. (17) Based on information reported by John Wolthuis on Schedule 13G filed with the SEC on February 12, 2018. P r o x y 57 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS In addition to the compensation arrangements, including employment, termination of employment and change in control arrangements, discussed in the section titled ‘‘Executive Compensation’’ the following is a description of each transaction since the beginning of our last fiscal year, and each currently proposed transaction in which: • we have been or are to be a participant; • the amount involved exceeded or exceeds $120,000; and • any of our directors, executive officers, or holders of more than 5% of our capital stock, or any immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest. Investors’ Rights Agreement We are party to an investors’ rights agreement which provides, among other things, that certain holders of our capital stock have the right to demand that we file a registration statement or request that their shares of our capital stock be covered by a registration statement that we are otherwise filing. The parties to the investors’ rights agreement include entities affiliated with Jeff Lawson and James McGeever, both our current directors, Evan Cooke, a former director, and entities affiliated with Fidelity, Bessemer Venture Partners, Redpoint Ventures and Union Square Ventures. Other Transactions We have granted stock options and RSUs to our named executive officers and certain of our directors. See the section titled ‘‘Executive Compensation—Individual Compensation Arrangements— Long-Term Incentive Compensation’’ and ‘‘Executive Compensation—Outstanding Equity Awards at Year-End Table’’ for a description of these stock options and RSUs. We have entered into severance and change in control arrangements with certain of our executive officers pursuant to employment offer letters and/or our severance plan that, among other things, provides for certain severance and change in control payments and benefits. See the sections titled ‘‘Executive Compensation—Post-Employment Compensation Arrangements’’ and ‘‘Executive Compensation—Potential Payments Upon Termination or Change in Control.’’ Other than as described above under this section titled ‘‘Certain Relationships and Related Party Transactions,’’ since January 1, 2017, we have not entered into any transactions, nor are there any currently proposed transactions, between us and a related party where the amount involved exceeds, or would exceed, $120,000, and in which any related person had or will have a direct or indirect material interest. We believe the terms of the transactions described above were comparable to terms we could have obtained in arm’s-length dealings with unrelated third parties. Indemnification of Officers and Directors Our amended and restated certificate of incorporation contains provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by Delaware law. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for the following: • any breach of their duty of loyalty to our Company or our stockholders; • any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; 58 • unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or • any transaction from which they derived an improper personal benefit. Any amendment to, or repeal of, these provisions will not eliminate or reduce the effect of these provisions in respect of any act, omission or claim that occurred or arose prior to that amendment or repeal. If the Delaware General Corporation Law is amended to provide for further limitations on the personal liability of directors of corporations, then the personal liability of our directors will be further limited to the greatest extent permitted by the Delaware General Corporation Law. In addition, our amended and restated bylaws provide that we will indemnify, to the fullest extent permitted by law, any person who is or was a party or is threatened to be made a party to any action, suit or proceeding by reason of the fact that he or she is or was one of our directors or officers or is or was serving at our request as a director or officer of another corporation, partnership, joint venture, trust or other enterprise. Our amended and restated bylaws provide that we may indemnify our employees and agents to the extent not prohibited by the Delaware General Corporation Law or other applicable law. Our amended and restated bylaws also provide that we must advance expenses incurred by or on behalf of a director or officer in advance of the final disposition of any action or proceeding, subject to limited exceptions. Further, we have entered into indemnification agreements with each of our directors and executive officers that may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements require us, among other things, to indemnify our directors and executive officers against liabilities that may arise by reason of their status or service. These indemnification agreements also require us to advance all expenses incurred by the directors and executive officers in investigating or defending any such action, suit or proceeding. We believe that these agreements are necessary to attract and retain qualified individuals to serve as directors and executive officers. The limitation of liability and indemnification provisions that are included in our amended and restated certificate of incorporation, amended and restated bylaws and in indemnification agreements that we have entered into with our directors and executive officers may discourage stockholders from bringing a lawsuit against our directors and executive officers for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against our directors and executive officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and executive officers as required by these indemnification provisions. We have obtained insurance policies under which, subject to the limitations of the policies, coverage is provided to our directors and executive officers against loss arising from claims made by reason of breach of fiduciary duty or other wrongful acts as a director or executive officer, including claims relating to public securities matters, and to us with respect to payments that may be made by us to these directors and executive officers pursuant to our indemnification obligations or otherwise as a matter of law. Certain of our non-employee directors may, through their relationships with their employers, be insured and/or indemnified against certain liabilities incurred in their capacity as members of our board of directors. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling our Company pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. 59 P r o x y Policies and Procedures for Related Party Transactions Our audit committee has the primary responsibility for reviewing and approving or disapproving ‘‘related party transactions,’’ which are transactions between us and related persons in which the aggregate amount involved exceeds or may be expected to exceed $120,000 and in which a related person has or will have a direct or indirect material interest. Our policy regarding transactions between us and related persons will provide that a related person is defined as a director, executive officer, nominee for director or greater than 5% beneficial owner of our Class A and Class B common stock, in each case since the beginning of the most recently completed year, and any of their immediate family members. Our audit committee charter provides that our audit committee shall review and approve or disapprove any related party transactions. Section 16(A) Beneficial Ownership Reporting Compliance OTHER MATTERS Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that our executive officers and directors, and persons who own more than 10% of our common stock, file reports of ownership and changes of ownership with the SEC. Such directors, executive officers and 10% stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. SEC regulations require us to identify in this proxy statement anyone who filed a required report late during the most recent year. Based on our review of forms we received, or written representations from reporting persons stating that they were not required to file these forms, we believe that during 2017, all Section 16(a) filing requirements were satisfied on a timely basis. 2017 Annual Report and SEC Filings Our financial statements for the year ended December 31, 2017 are included in our annual report on Form 10-K, which we will make available to stockholders at the same time as this proxy statement. Our annual report and this proxy statement are posted on our website at https://investors.twilio.com and are available from the SEC at its website at www.sec.gov. You may also obtain a copy of our annual report without charge by sending a written request to Investor Relations, Twilio Inc., 375 Beale Street, Suite 300, San Francisco, California 94105. * * * The board of directors does not know of any other matters to be presented at the Annual Meeting. If any additional matters are properly presented at the Annual Meeting, the persons named in the enclosed proxy card will have discretion to vote shares they represent in accordance with their own judgment on such matters. It is important that your shares be represented at the Annual Meeting, regardless of the number of shares that you hold. You are, therefore, urged to vote by telephone or by using the Internet as instructed on the enclosed proxy card or execute and return, at your earliest convenience, the enclosed proxy card in the envelope that has also been provided. THE BOARD OF DIRECTORS San Francisco, California April 27, 2018 60 APPENDIX A KEY BUSINESS METRICS AND NON-GAAP FINANCIAL MEASURE INFORMATION Set forth below in this Appendix A is important information about how we measure Base Revenue, Active Customer Accounts and other key business metrics as well as a reconciliation of our non-GAAP to GAAP financial measures. Number of Active Customer Accounts We believe that the number of our Active Customer Accounts is an important indicator of the growth of our business, the market acceptance of our platform and future revenue trends. We define an Active Customer Account at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least $5 of revenue in the last month of the period. We believe that the use of our platform by our customers at or above the $5 per month threshold is a stronger indicator of potential future engagement than trial usage of our platform or usage at levels below $5 per month. A single organization may constitute multiple unique Active Customer Accounts if it has multiple account identifiers, each of which is treated as a separate Active Customer Account. In the years ended December 31, 2017, 2016 and 2015, revenue from Active Customer Accounts represented over 99% of total revenue in each period. Base Revenue We monitor Base Revenue as one of the more reliable indicators of future revenue trends. Base Revenue consists of all revenue other than revenue from large Active Customer Accounts that have never entered into 12-month minimum revenue commitment contracts with us, which we refer to as Variable Customer Accounts. While almost all of our customer accounts exhibit some level of variability in the usage of our products, based on our experience, we believe that Variable Customer Accounts are more likely to have significant fluctuations in usage of our products from period to period, and therefore that revenue from Variable Customer Accounts may also fluctuate significantly from period to period. This behavior is best evidenced by the decision of such customers not to enter into contracts with us that contain minimum revenue commitments, even though they may spend significant amounts on the use of our products and they may be foregoing more favorable terms often available to customers that enter into committed contracts with us. This variability adversely affects our ability to rely upon revenue from Variable Customer Accounts when analyzing expected trends in future revenue. For historical periods through March 31, 2016, we defined a Variable Customer Account as an Active Customer Account that (i) had never signed a minimum revenue commitment contract with us for a term of at least 12 months and (ii) had met or exceeded 1% of our revenue in any quarter in the periods presented through March 31, 2016. To allow for consistent period-to-period comparisons, in the event a customer account qualified as a Variable Customer Account as of March 31, 2016, or a previously Variable Customer Account ceased to be an Active Customer Account as of such date, we included such customer account as a Variable Customer Account in all periods presented. For reporting periods starting with the three months ended June 30, 2016, we define a Variable Customer Account as a customer account that (a) has been categorized as a Variable Customer Account in any prior quarter, as well as (b) any new customer account that (i) is with a customer that has never signed a minimum revenue commitment contract with us for a term of at least 12 months and (ii) meets or exceeds 1% of our revenue in a quarter. Once a customer account is deemed to be a Variable Customer Account in any period, it remains a Variable Customer Account in subsequent periods unless such customer enters into a minimum revenue commitment contract with us for a term of at least 12 months. In the years ended December 31, 2017, 2016 and 2015, we had six, eight and nine Variable Customer Accounts, which represented 8%, 11% and 18% , respectively, of our total revenue. A-1 P r o x y Non-GAAP Financial Measures We use the following non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations, and assists in comparisons with other companies, many of which use similar non-GAAP financial information to supplement their GAAP results. Non-GAAP financial information is presented for supplemental informational purposes only, and should not be considered a substitute for financial information presented in accordance with generally accepted accounting principles, and may be different from similarly-titled non-GAAP measures used by other companies. Whenever we use a non-GAAP financial measure, a reconciliation is provided to the most closely applicable financial measure stated in accordance with generally accepted accounting principles. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures. Non-GAAP Loss from Operations and Non-GAAP Operating Margin For the periods presented, we define non-GAAP loss from operations and non-GAAP operating margin as GAAP loss from operations and GAAP operating margin, respectively, adjusted to exclude stock-based compensation, amortization of acquired intangibles, acquisition-related expenses, release of tax liability upon obligation settlement, charitable contribution, gain on lease termination and payroll taxes related to stock-based compensation. Reconciliation: Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-GAAP adjustments: Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of acquired intangibles . . . . . . . . . . . . . . . . . . Acquisition-related expenses . . . . . . . . . . . . . . . . . . . . . . . . Release of tax liability upon obligation settlement . . . . . . . . Charitable contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on lease termination . . . . . . . . . . . . . . . . . . . . . . . . . . Payroll taxes related to stock-based compensation . . . . . . . . . Year Ended December 31, 2017 2016 (in thousands) $(66,074) $(41,315) 49,619 5,620 310 (13,365) 1,172 (295) 2,950 24,225 880 499 (805) 3,860 — 434 Non-GAAP loss from operations . . . . . . . . . . . . . . . . . . . $(20,063) $(12,222) Non-GAAP operating margin . . . . . . . . . . . . . . . . . . . . . . (5)% (4)% A-2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 For the fiscal year ended December 31, 2017 or (cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-37806 Twilio Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 26-2574840 (I.R.S. Employer Identification Number) 375 Beale Street, Suite 300 San Francisco, California 94105 (Address of principal executive offices) (Zip Code) (415) 390-2337 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class (Name of each exchange on which registered) Class A Common Stock, par value $0.001 per share The New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes (cid:2) No (cid:3) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act: Yes (cid:3) No (cid:2) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:2) No (cid:3) Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:2) No (cid:3) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:3) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company’’ and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act. Large accelerated filer (cid:2) Accelerated filer (cid:3) Non-accelerated filer (cid:3) (Do not check if a smaller reporting company) Smaller reporting company (cid:3) Emerging growth company (cid:3) If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:3) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:3) No (cid:2) The aggregate market value of stock held by non-affiliates as of June 30, 2017, was $1,678 million based upon $29.11 per share, the closing price for such date on the New York Stock Exchange. On January 31, 2018, the registrant had 70,176,391 shares of Class A common stock and 24,054,845 shares of Class B common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2017. F o r m 1 0 - K Twilio Inc. Annual Report on Form 10-K For the Fiscal Year Ended December 31, 2017 TABLE OF CONTENTS PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . . Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 5 19 51 51 51 52 53 55 60 82 84 134 134 135 136 136 136 136 136 Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 139 PART IV 2 Special Note Regarding Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the ‘‘Exchange Act’’), and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can 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 words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about: • our future financial performance, including our revenue, cost of revenue, gross margin and operating expenses, ability to generate positive cash flow and ability to achieve and sustain profitability; • the impact and expected results from changes in our relationship with our larger customers; • the sufficiency of our cash and cash equivalents to meet our liquidity needs; • anticipated technology trends, such as the use of and demand for cloud communications; • our ability to continue to build and maintain credibility with the global software developer community; • our ability to attract and retain customers to use our products; • our ability to attract and retain enterprises and international organizations as customers for our products; • our ability to form and expand partnerships with independent software vendors and system integrators; • the evolution of technology affecting our products and markets; • our ability to introduce new products and enhance existing products; • our ability to optimize our network service provider coverage and connectivity; • our ability to pass on our savings associated with our platform optimization efforts to our customers; • our ability to successfully enter into new markets and manage our international expansion; • the attraction and retention of qualified employees and key personnel; • our ability to effectively manage our growth and future expenses and maintain our corporate culture; • our anticipated investments in sales and marketing and research and development; • our ability to maintain, protect and enhance our intellectual property; • our ability to successfully defend litigation brought against us; and • our ability to comply with modified or new laws and regulations applying to our business, including GDPR and other privacy regulations that may be implemented in the future. We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K. 3 F o r m 1 0 - K You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in Part I, Item 1A,‘‘Risk Factors’’ and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. 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 described in the forward-looking statements. The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward- looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. 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. 4 Item 1. Business Overview PART I Software developers are reinventing nearly every aspect of business today. Yet as developers, we repeatedly encountered an area where we could not innovate—communications. Because communication is a fundamental human activity and vital to building great businesses, we wanted to incorporate communications into our software applications, but the barriers to innovation were too high. Twilio was started to solve this problem. We believe the future of communications will be written in software, by the developers of the world—our customers. By empowering them, our mission is to fuel the future of communications. Cloud platforms are a new category of software that enable developers to build and manage applications without the complexity of creating and maintaining the underlying infrastructure. These platforms have arisen to enable a fast pace of innovation across a range of categories, such as computing and storage. We are the leader in the Cloud Communications Platform category. We enable developers to build, scale and operate real-time communications within software applications. Our platform consists of three layers: our Engagement Cloud, Programmable Communications Cloud and Super Network. Our Engagement Cloud software is a set of Application Programming Interfaces (‘‘APIs’’) that handles the higher-level communication logic needed for nearly every type of customer engagement. These APIs are focused on the business challenges that a developer is looking to address, allowing our customers to more quickly and easily build better ways to engage with their customers throughout their journey. Our Programmable Communications Cloud software is a set of APIs that enables developers to embed voice, messaging and video capabilities into their applications. The Programmable Communications Cloud is designed to support almost all the fundamental ways humans communicate, unlocking innovators to address just about any communication market. The Super Network is our software layer that allows our customers’ software to communicate with connected devices globally. It interconnects with communications networks around the world and continually analyzes data to optimize the quality and cost of communications that flow through our platform. The Super Network also contains a set of API’s giving our customers access to more foundational components of our platform, like phone numbers. We had 48,979 Active Customer Accounts as of December 31, 2017, representing organizations big and small, old and young, across nearly every industry, with one thing in common: they are competing by using the power of software to build differentiation through communications. With our platform, our customers are disrupting existing industries and creating new ones. For example, our customers’ software applications use our platform to notify a diner when a table is ready, provide enhanced application security through two-factor authentication, connect potential buyers to real estate agents, and power large, omni-channel contact centers. The range of applications that developers build with the Twilio platform has proven to be nearly limitless. Our goal is for Twilio to be in the toolkit of every software developer in the world. Because big ideas often start small, we encourage developers to experiment and iterate on our platform. We love when developers explore what they can do with Twilio, because one day they may have a business problem that they will use our products to solve. As our customers succeed, we share in their success through our usage-based revenue model. Our revenue grows as customers increase their usage of a product, extend their usage of a product to new applications or adopt a new product. We believe the most useful indicator of this increased activity from our existing customer accounts is our Dollar-Based Net Expansion Rate, which was 128% and 161% for the years ended December 31, 2017 and 2016, respectively. See Part II, Item 7, 5 F o r m 1 0 - K ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Dollar-Based Net Expansion Rate.’’ Our Platform Approach Twilio’s mission is to fuel the future of communications. We enable developers to build, scale and operate real-time communications within software applications. We believe every application can be enhanced through the power of communication. Over time, we believe that all of our communications that do not occur in person will be integrated into software applications. Our platform approach enables developers to build this future. Using our software, developers are able to incorporate communications into applications that span a range of industries and functionalities. Our Solution Partner customers, which embed our products in the solutions they sell to other businesses, are also able to leverage our products to deliver their applications. Common Use Cases • Anonymous Communications. Enabling users to have a trusted means of communications where they prefer not to share private information like their telephone number. Examples include conversations between drivers and riders or texting after meeting through a dating website. • Alerts and Notifications. Alerting a user that an event has occurred, such as when a table is ready, a flight is delayed or a package is shipped. • Contact Center. Improving customer support of powering customer care teams with voice, messaging and video capabilities that integrate with other systems to add context, such as a caller’s support ticket history of present location. • Call Tracking. Using phone numbers to provide detailed analytics on phone calls to measure the effectiveness of marketing campaigns or lead generation activities in a manner similar to how web analytics track and measure online activity. • Mobile Marketing. Integrating messaging with marketing automation technology, allowing organizations to deliver targeted and timely contextualized communications to consumers. • User Security. Verifying user identity through two-factor authentication prior to log-in or validating transactions within an application’s workflow. This adds an additional layer of security to any application. • Twilio For Good. Partnering with nonprofit organizations through Twilio.org, to use the power of communications to help solve social challenges, such as an SMS hotline to fight human trafficking, an emergency volunteer dispatch system and appointment reminders for medical visits in developing nations. Our Platform Engagement Cloud While developers can build a broad range of applications on our platform, certain use cases are more common. Our Engagement Cloud APIs build upon our Programmable Communications Cloud to offer more fully implemented functionality for a specific purpose, such as two-factor authentication or skills-based routing in a contact center, thereby saving developers significant time in building their applications. 6 Part of our core strategy is to provide a broad set of lower level building blocks (i.e. the products in our Programmable Communications Cloud and Super Network) that can be used to build virtually any use case. By doing this, we allow developers’ creativity to flourish across the widest set of use cases—some of which haven’t even been invented yet. As we observe what use cases are most common, and the work flows our customers find most challenging, we create the products in our Engagement Cloud to bring these learnings to a broader audience. The higher level APIs we have created in this layer of our platform are focused on addressing a massive opportunity to recreate and modernize the field of customer engagement. The means by which most companies engage with their customers is archaic and disjointed, made more glaring by the pace of development in other areas of communication. Our products in the Engagement Cloud combine the flexibility provided by our platform model along with the learnings we’ve gained over the past ten years focused on driving success at tens of thousands of customers. Programmable Communications Cloud Our Programmable Communications Cloud provides a range of products that enables developers to embed voice, messaging and video capabilities into their applications. Our easy-to-use developer APIs provide a programmatic channel to access our software. Developers can utilize our intuitive programming language, TwiML, to specify application functions such as , and , leveraging our software to manage the complexity of executing the specified functions. Our Programmable Communications Cloud consists of software products that can be used individually or in combination to build rich contextual communications within applications. We do not aim to provide complete business solutions, rather our Programmable Communications Cloud offers flexible building blocks that enable our customers to build what they need. Our Programmable Communications Cloud includes: • Programmable Voice. Our Programmable Voice software products allow developers to build solutions to make and receive phone calls globally, and to incorporate advanced voice functionality such as text-to-speech, conferencing, recording and transcription. Programmable Voice, through our advanced call control software, allows developers to build customized applications that address use cases such as contact centers, call tracking and analytics solutions and anonymized communications. • Programmable Messaging. Our Programmable Messaging software products allow developers to build solutions to send and receive text messages globally, and incorporate advanced messaging functionality such as emoji, picture messaging and localized languages. Our customers use Programmable Messaging, through software controls, to power use cases, such as appointment reminders, delivery notifications, order confirmations and customer care. • Programmable Video. Our Programmable Video software products enable developers to build next-generation mobile and web applications with embedded video, including for use cases such as customer care, collaboration and physician consultations. Super Network Our Programmable Communications Cloud is built on top of our global software layer, which we call our Super Network. Our Super Network interfaces intelligently with communications networks globally. We use software to construct a high performance network that continuously optimizes quality and deliverability for our customers. Our Super Network breaks down the geopolitical boundaries and scale limitations of physical network infrastructure and provides our customers that use our Programmable Communications Cloud and Engagement Cloud offering access to over 180 countries. 7 F o r m 1 0 - K The Super Network also contains a set of API’s giving our customers access to more foundational components of our platform, such as phone numbers. We have strategically built out our global infrastructure and operate in 27 cloud data centers in nine geographically distinct regions. These data centers serve as interconnection points with network service providers and customers alike, giving us a truly global reach and a redundant means to connect businesses with billions of customers all over the world. Our provider relationships and deployed infrastructure have allowed us to catalogue the many different communications standards that exist today and offer them up to businesses as one consolidated platform with simple, easy-to-use APIs. We are continually adding new network service provider relationships as we scale, and we are not dependent upon any single network service provider to conduct our business. The strength of Twilio’s Super Network comes from the software intelligence we’ve embedded throughout our communications network. By leveraging our software expertise we eliminate the traditional complexities and uncertainties of telecommunications and deliver a consistent and high quality communications platform for our customers. This allows customers to spend less time focusing on mastering the highly specialized and complex telecommunications industry and more time focusing on building best-in-class customer engagement experiences. Our proprietary technology selects which network service providers to use and routes the communications in order to optimize the quality and cost of the communications across our product offerings. Our Super Network analyzes massive volumes of data from our traffic, the applications that power it, and the underlying provider networks in order to optimize our customers’ communications for quality and cost. As such, with every new message and call, our Super Network becomes more robust, intelligent and efficient, enabling us to provide better performance and deliverability for our customers. Our Super Network’s sophistication becomes increasingly difficult for others to replicate over time as it is continually learning, improving and scaling. Our Business Model for Innovators Our goal is to include Twilio in the toolkit of every developer in the world. Because big ideas often start small, developers need the freedom and tools to experiment and iterate on their ideas. In order to empower developers to experiment, our developer-first business model is low friction, eliminating the upfront costs, time and complexity that typically hinder innovation. We call this approach our Business Model for Innovators, which empowers developers by reducing friction and upfront costs, encouraging experimentation, and enabling developers to grow as customers as their ideas succeed. Developers can begin building with a free trial. They have access to self-service documentation and free customer support to guide them through the process. Once developers determine that our software meets their needs, they can flexibly increase consumption and pay based on usage. In short, we acquire developers like consumers and enable them to spend like enterprises. Our Growth Strategy We are the leader in the Cloud Communications Platform category based on revenue, market share and reputation, and intend to continue to set the pace for innovation. We will continue to invest aggressively in our platform approach, which prioritizes increasing our reach and scale. We intend to pursue the following growth strategies: • Continue Significant Investment in our Technology Platform. We will continue to invest in building new software capabilities and extending our platform to bring the power of contextual communications to a broader range of applications, geographies and customers. We have a substantial research and development team, comprising approximately 50% of our headcount as of December 31, 2017. 8 • Grow Our Developer Community and Accelerate Adoption. We will continue to enhance our relationships with developers globally and seek to increase the number of developers on our platform. As of December 31, 2017, we had 48,979 Active Customer Accounts and well over one million registered developer accounts registered on our platform. In addition to adding new developers, we believe there is significant opportunity for revenue growth from developers who have already registered accounts with us but who have not yet built their software applications with us, or whose applications are in their infancy and will grow with Twilio into an Active Customer Account. • Increase Our International Presence. Our platform operates in over 180 countries today, making it as simple to communicate from S˜ao Paulo as it is from San Francisco. Customers outside the United States are increasingly adopting our platform, and for the years ended December 31, 2016 and 2017, revenue from international customer accounts accounted for 16% and 23% of our total revenue, respectively. We are investing to meet the requirements of a broader range of global developers and enterprises. We plan to grow internationally by continuing to expand our operations outside of the United States and collaborating with international strategic partners. • Expand Focus on Enterprises. We plan to drive greater awareness and adoption of Twilio from enterprises across industries. We intend to further increase our investment in sales and marketing to meet evolving enterprise needs globally, in addition to extending our enterprise- focused use cases and platform capabilities, like our Twilio Enterprise Plan. Additionally, we believe there is significant opportunity to expand our relationships with existing enterprise customers. • Further Enable Solution Partner Customers. We have relationships with a number of Solution Partner customers that embed our products in the solutions that they sell to other businesses. We intend to expand our relationships with existing Solution Partner customers and to add new Solution Partner customers. We plan to invest in a range of initiatives to encourage increased collaboration with, and generation of revenue from, Solution Partner customers. • Expand ISV Development Platform and SI Partnerships. We have started developing relationships with independent software vendor (‘‘ISV’’) development platforms and system integrators (‘‘SIs’’). ISV development platforms integrate Twilio to extend the functionality of their platforms, which expands our reach to a broader range of customers. SIs provide consulting and development services for organizations that have limited software development expertise to build our platform into their software applications. We generate revenue through our relationships with ISV development platforms and SIs when our products are used within the software or applications into which they are integrated by ISV development platforms and SIs. We do not share usage-based revenue with ISV development platforms or SIs, nor do we pay them to include our products in their offerings. We intend to continue to invest in and develop the ecosystem for our solutions in partnership with ISV development platforms and SIs to accelerate awareness and adoption of our platform. • Selectively Pursue Acquisitions and Strategic Investments. We may selectively pursue acquisitions and strategic investments in businesses and technologies that strengthen our platform. In February 2015, we acquired Authy, a leading provider of authentication-as-a-service for large-scale applications. With the integration of Authy, we now provide a cloud-based API to seamlessly embed two-factor authentication and phone verification into any application. In November 2016, we acquired the proprietary Web Real-Time-Communication (‘‘WebRTC’’) media processing technologies built by the team behind the Kurento Open Source Project. The Kurento Media Server capabilities, including large group communications, transcoding, recording and advanced media processing, has been integrated into Twilio Programmable Video. In 9 F o r m 1 0 - K February 2017, we acquired Beepsend, AB, a messaging provider based in Sweden specializing in messaging and SMS solutions. Our Values and Leadership Principles Our core values, called our ‘‘Nine Values,’’ are at the center of everything that we do. As a company built by developers for developers, these values guide us to work in a way that exemplifies many attributes of the developer ethos. These are not mere words on the wall. We introduce these values to new hires upon joining our company, and we continually weave these values into everything we do. Our values provide a guide for the way our teams work, communicate, set goals and make decisions. We believe leadership is a behavior, not a position. In addition to our values, we have articulated the leadership traits we all strive to achieve. Our leadership principles apply to every Twilion, not just 23FEB201804345574 10 managers or executives, and provide a personal growth path for employees in their journeys to become better leaders. The combination of our Nine Values and our leadership principles has created a blueprint for how Twilions worldwide interact with customers and with each other, and for how they respond to new challenges and opportunities. 23FEB201806364122 Twilio.org We believe we can create greater social good through better communications. Through Twilio.org, which is a part of our company and not a separate legal entity, we donate and discount our products to nonprofits, who use our products to engage their audience, expand their reach and focus on making a meaningful change in the world. Twilio.org’s mission is to send a billion messages for good. To that end, in 2015, we reserved 1% of our common stock to fund operations of Twilio.org. In our follow-on public offering in October 2016, we sold 100,000 shares of Class A common stock and raised $3.9 million to fund and support the operations of Twilio.org. In December 2016, Twilio.org donated the full $3.9 million proceeds into an independent Donor Advised Fund (‘‘DAF’’) to further our philanthropic goals. In November 2017, Twilio.org donated 45,383 shares of Class A common stock with a fair value of $1.2 million into the same DAF. Both donations were treated as charitable contributions in our consolidated statements of operations included elsewhere in this Annual Report on Form 10-K. As of December 31, 2017, the total remaining shares reserved for Twilio.org was 635,014. F o r m 1 0 - K Our Products Engagement Cloud While developers can build a broad range of applications on our platform, certain use cases are more common. Our Engagement Cloud APIs build upon our Programmable Communications Cloud to offer more fully implemented functionality for a specific purpose, such as two-factor authentication or skills-based routing in a contact center, thereby saving developers significant time in building their applications. 11 Account Security Identity and communications are closely linked, and this is a critical business need for our customers. Using our two-factor authentication APIs, developers can add an extra layer of security to their applications with second-factor passwords sent to a user’s phone via SMS, voice or push notifications. Our Account Security products include: • Authy. Provides user authentication codes through a variety of formats based on the developer’s needs. Authentication codes can be delivered through the Authy app on registered mobile phones, desktop, or smart devices or via SMS and voice automated phone calls. In addition, authentication can be determined through a push notification on registered smartphones • Lookup. Allows developers to validate number format, device type, and provider prior to sending messages or initiating calls. • Verify. Allows developers to deliver a one-time passcode through SMS or voice to verify that a user is in possession of the device being registered TaskRouter A software product that enables intelligent multi-task routing in contact centers to optimize workflows, such as routing a call to an available agent. A task can be a phone call, SMS, chat message, lead, support ticket or even machine learning from a connected device. We charge on a per-use basis for most of our Engagement Cloud APIs. Programmable Communications Cloud Our Programmable Communications Cloud consists of software for voice, messaging, video and authentication that empowers developers to build applications that can communicate with connected devices globally. We do not aim to provide complete business solutions, rather our Programmable Communications Cloud offers flexible building blocks that enable our customers to build what they need. Programmable Voice Our Programmable Voice software products allow developers to build solutions to make and receive phone calls globally, and to incorporate advanced voice functionality such as text-to-speech, conferencing, recording and transcription. Programmable Voice, through our advanced call control software, allows developers to build customized applications that address use cases such as contact centers, call tracking and analytics solutions and anonymized communications. Our voice software works over both the traditional public switch telephone network, and over Internet Protocol. Programmable Voice includes: • Twilio Voice. Initiate, receive and manage phone calls globally, end to end through traditional voice technology or between web browsers and landlines or mobile phones. Voice calling can also be integrated natively in Apple iOS and Google Android apps. • Call Recording. Securely record, store, transcribe and retrieve voice calls in the cloud. • Global Conference. Integrate audio conferencing that intelligently routes calls through cloud data centers in the closest of seven geographic regions to reduce latency. Scales from Basic, for a limited number of participants, to Epic, for an unlimited number of participants. We charge on a per-minute basis for most of our Programmable Voice products. 12 Programmable Messaging Our Programmable Messaging software products allow developers to build solutions to send and receive text messages globally, and incorporate advanced messaging functionality such as emoji, picture messaging and localized languages. Our customers use Programmable Messaging, through software controls, to power use cases, such as appointment reminders, delivery notifications, order confirmations and customer care. We offer messaging over long-code numbers, short-code numbers, messaging apps such as Facebook Messenger and over IP through our Android, iOS and JavaScript software development kits. Programmable Messaging includes: • Twilio SMS. Programmatically send, receive and track SMS messages around the world, supporting localized languages in nearly every market. • Twilio MMS. Exchange picture messages and more over U.S. and Canadian phone numbers from customer applications with built-in image transcoding and media storage. • Copilot. Intelligent software layer that handles tasks, such as dynamically sending messages from a phone number that best matches the geographic location of the recipient based on a global pool of numbers. • Programmable Chat. Deploy contextual, in-app messaging at global scale. • Channels. Programmatically send, receive and track messages to messaging apps such as Facebook Messenger and Viber globally. • Toll-Free SMS. Send and receive text messages with the same toll-free number used for voice calls in the United States and Canada. We charge on a per-message basis for most of our Programmable Messaging products. Programmable Video Programmable Video provides developers with the building blocks to add voice and video to web and mobile applications. Developers can address multiple use cases such as remote customer care, multi-party collaboration, video consultations and more by leveraging Programmable Video’s global cloud infrastructure and powerful SDKs to build on WebRTC. Programmable Video includes: • Twilio Video. Create rich, multi-party video experiences in web and mobile applications with features such as one-to-one and multi-party video calling, cloud based recordings, screen sharing etc. • Network Traversal. Provide low-latency, cost-effective and reliable Session Traversal Utilities for Network Address Translation (STUN) and Traversal Using Relay for Network Address Translation (TURN) capabilities distributed across five continents. This functionality allows developers to initiate peer-to-peer video sessions across any internet-connected device globally. We charge on a per-connected-endpoint, per-active-endpoint and per-gigabit basis for our F o r m 1 0 - K Programmable Video products. Super Network Our Programmable Communications Cloud is built on top of our global software layer, which we call our Super Network. Our Super Network interfaces intelligently with communications networks globally. We do not own any physical network infrastructure. We use software to build a high performance network that optimizes performance for our customers. The Super Network also contains a set of API’s giving our customers access to more foundational components of our platform, like phone numbers and Session Initiation Protocol (‘‘SIP’’) Trunking. 13 • Instant Phone Number Provisioning. Acquire local, national, mobile and toll-free phone numbers on demand in over 100 countries and connect them into the customers’ applications. • Short Codes. A five to seven digit phone number in the United States, Canada and the United Kingdom used to send and receive a high-volume of messages per second. • Elastic SIP Trunking. Connect legacy voice applications to our Super Network over IP infrastructure with globally-available phone numbers and pay-as-you-go pricing. • Interconnect. Connect privately to Twilio to enable enterprise grade security and quality of service for Twilio Voice and Elastic SIP Trunking. We charge on a per-minute or per-phone-number basis for most of our Super Network products. Our Employees As of December 31, 2017, we had a total of 996 employees, including 215 employees located outside of the United States. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We have not experienced any work stoppages, and we consider our relations with our employees to be good. Research and Development Our research and development efforts are focused on ensuring that our platform is resilient and available to our customers at any time, and on enhancing our existing products and developing new products. Our research and development organization is built around small development teams. Our small development teams foster greater agility, which enables us to develop new, innovative products and make rapid changes to our infrastructure that increase resiliency and operational efficiency. Our development teams designed, built and continue to expand our Engagement Cloud, Programmable Communications Cloud and Super Network. As of December 31, 2017, we had 497 employees in our research and development organization. We intend to continue to invest in our research and development capabilities to extend our platform and bring the power of contextual communications to a broader range of applications, geographies and customers. Our research and development expenses for the years ended December 31, 2017, 2016 and 2015 were $120.7 million, $77.9 million and $42.6 million, respectively. Sales and Marketing Our sales and marketing teams work together closely to drive awareness and adoption of our platform, accelerate customer acquisition and generate revenue from customers. Our go-to-market model is primarily focused on reaching and serving the needs of developers. We are a pioneer of developer evangelism and education and have cultivated a large global developer community. We reach developers through community events and conferences, including our SIGNAL developer conference, to demonstrate how every developer can create differentiated applications incorporating communications using our products. Once developers are introduced to our platform, we provide them with a low-friction trial experience. By accessing our easy-to-configure APIs, extensive self-service documentation and customer support team, developers can build our products into their applications and then test such applications during an initial free trial period that we provide. Once they have decided to use our products beyond the initial free trial period, customers provide their credit card information and only pay for the actual usage of our products. Our self-serve pricing matrix is publicly available and it allows for customers to 14 receive automatic tiered discounts as their usage of our products increases. As customers’ use of our products grows larger, some enter into negotiated contracts with terms that dictate pricing, and typically include some level of minimum revenue commitments. Historically, we have acquired the substantial majority of our customers through this self-service model. As customers expand their usage of our platform, our relationships with them often evolve to include business leaders within their organizations. Once our customers reach a certain spending level with us, we support them with account managers or customer success advocates to ensure their satisfaction and expand their usage of our products. When potential customers do not have the available developer resources to build their own applications, we refer them to our Solution Partners, who embed our products in the solutions that they sell to other businesses, such as contact centers and sales force and marketing automation. We also supplement our self-service model with a sales effort aimed at engaging larger potential customers, strategic leads and existing customers through a direct sales approach. We have supplemented this sales effort with our Twilio Enterprise Plan, which provides capabilities for advanced security, access management and granular administration. Our sales organization targets technical leaders and business leaders who are seeking to leverage software to drive competitive differentiation. As we educate these leaders on the benefits of developing applications incorporating our products to differentiate their business, they often consult with their developers regarding implementation. We believe that developers are often advocates for our products as a result of our developer-focused approach. Our sales organization includes sales development, inside sales, field sales and sales engineering personnel. As of December 31, 2017, we had 358 employees in our sales and marketing organization. Customer Support We have designed our products and platform to be self-service and require minimal customer support. To enable seamless self-service, we provide all of our users with helper libraries, comprehensive documentation, how-to’s and tutorials. We supplement and enhance these tools with the participation of our engaged developer community. In addition, we provide support options to address the individualized needs of our customers. All developers get free email-based support with API status notifications. Our developers also engage with the broader Twilio community to resolve certain issues. We also offer three paid tiers of email and phone support with increasing levels of availability and guaranteed response times. Our highest tier personalized plan is intended for our largest customers and includes guaranteed response times that vary based on the priority of the request, a dedicated support engineer, a duty manager and quarterly status review. Our support model is global, with 24x7 coverage and support offices located in the United States, the United Kingdom, Estonia and Singapore. We currently derive an insignificant amount of revenue from fees charged for customer support. Competition The market for Cloud Communications Platform is rapidly evolving and increasingly competitive. We believe that the principal competitive factors in our market are: F o r m 1 0 - K • completeness of offering; • credibility with developers; • global reach; • ease of integration and programmability; • product features; 15 • platform scalability, reliability, security and performance; • brand awareness and reputation; • the strength of sales and marketing efforts; • customer support; and • the cost of deploying and using our products. We believe that we compete favorably on the basis of the factors listed above. We believe that none of our competitors currently competes directly with us across all of our product offerings. Our competitors fall into four primary categories: • legacy on-premise vendors, such as Avaya and Cisco; • regional network service providers that offer limited developer functionality on top of their own physical infrastructure; • smaller software companies that compete with portions of our product line; and • software-as-a-service ‘‘SaaS’’ companies that offer prepackaged applications for a narrow set of use cases. Some of our competitors have greater financial, technical and other resources, greater name recognition, larger sales and marketing budgets and larger intellectual property portfolios. As a result, certain of our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices, with greater depth than our products or geographies where we do not operate. With the introduction of new products and services and new market entrants, we expect competition to intensify in the future. Moreover, as we expand the scope of our platform, we may face additional competition. Intellectual Property We rely on a combination of patent, copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements and other contractual protections, to protect our proprietary technology. We also rely on a number of registered and unregistered trademarks to protect our brand. As of December 31, 2017, in the United States, we had been issued 77 patents, which expire between 2029 and 2036, and had 42 patent applications pending for examination and three pending provisional applications. As of such date, we also had seven issued patents and seven patent applications pending for examination in foreign jurisdictions, all of which are related to U.S. patents and patent applications. In addition, as of December 31, 2017, we had 14 trademarks registered in the United States and 61 trademarks registered in foreign jurisdictions. We further seek to protect our intellectual property rights by implementing a policy that requires our employees and independent contractors involved in development of intellectual property on our behalf to enter into agreements acknowledging that all works or other intellectual property generated or conceived by them on our behalf are our property, and assigning to us any rights, including intellectual property rights, that they may claim or otherwise have in those works or property, to the extent allowable under applicable law. Despite our efforts to protect our technology and proprietary rights through intellectual property rights, licenses and other contractual protections, unauthorized parties may still copy or otherwise obtain and use our software and other technology. In addition, we intend to continue to expand our 16 international operations, and effective intellectual property, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Further, companies in the communications and technology industries may own large numbers of patents, copyrights and trademarks and may frequently threaten litigation, or file suit against us based on allegations of infringement or other violations of intellectual property rights. We currently are subject to, and expect to face in the future, allegations that we have infringed the intellectual property rights of third parties, including our competitors and non-practicing entities. Regulatory We are subject to a number of U.S. federal and state and foreign laws and regulations that involve matters central to our business. These laws and regulations may involve privacy, data protection, intellectual property, competition, consumer protection, export taxation or other subjects. Many of the laws and regulations to which we are subject are still evolving and being tested in courts and could be interpreted in ways that could harm our business. In addition, the application and interpretation of these laws and regulations often are uncertain, particularly in the new and rapidly evolving industry in which we operate. Because global laws and regulations have continued to develop and evolve rapidly, it is possible that we or our products or our platform may not be, or may not have been, compliant with each such applicable law or regulation. For example, the GDPR, which will take full effect on May 25, 2018, enhances data protection obligations for businesses and requires service providers (data processors) processing personal data on behalf of customers to cooperate with European data protection authorities, implement security measures and keep records of personal data processing activities. Noncompliance with the GDPR can trigger fines equal to the greater of A20 million or 4% of global annual revenue. Given the breadth and depth of changes in data protection obligations, preparing to meet the requirements of GDPR before its effective date has required significant time and resources, including a review of our technology and systems currently in use against the requirements of GDPR. We have taken steps to prepare for complying with GDPR, including integrating GDPR-compliant privacy protections into our products and platform, commercial agreements and record-keeping practices to help us and our customers meet the compliance obligations of GDPR. However, additional EU laws and regulations (and member states’ implementations thereof) further govern the protection of consumers and of electronic communications. If our efforts to comply with GDPR or other applicable EU laws and regulations are not successful, we may be subject to penalties and fines that would adversely impact our business and results of operations, and our ability to conduct business in the EU could be significantly impaired. In addition, the Telephone Consumer Protection Act of 1991 (‘‘TCPA’’), restricts telemarketing and the use of automatic text messages without proper consent. The scope and interpretation of the laws that are or may be applicable to the delivery of text messages are continuously evolving and developing. If we do not comply with these laws, or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could face direct liability. Corporate Information Twilio Inc. was incorporated in Delaware in March 2008. Our principal executive offices are located at 375 Beale Street, Third Floor, San Francisco, California 94105, and our telephone number is (415) 390-2337. Our website address is www.twilio.com. Information contained on, or that can be accessed through, our website does not constitute part of this Annual Report on Form 10-K. F o r m 1 0 - K 17 Twilio, the Twilio logo and other trademarks or service marks of Twilio appearing in this Annual Report on Form 10-K are the property of Twilio. Trade names, trademarks and service marks of other companies appearing in this Annual Report on Form 10-K are the property of their respective holders Information about Geographic Revenue Information about geographic revenue is set forth in Note 9 of our Notes to our Consolidated Financial Statements included in Part II, Item 8, ‘‘Financial Statements and Supplementary Data’’ of this Annual Report on Form 10-K. Available Information The following filings are available through our investor relations website after we file them with the Securities and Exchange Commission (‘‘SEC’’): Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and our Proxy Statement for our annual meeting of stockholders. These filings are also available for download free of charge on our investor relations website. Our investor relations website is located at http://investors.twilio.com/. You may obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov. We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website. Further corporate governance information, including our corporate governance guidelines and code of business conduct and ethics, is also available on our investor relations website under the heading ‘‘Corporate Governance.’’ The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. 18 Item 1A. Risk Factors A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including Part II, Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and our condensed consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the market price of our Class A common stock could decline. Risks Related to Our Business and Our Industry The market for our products and platform is new and unproven, may decline or experience limited growth and is dependent in part on developers continuing to adopt our platform and use our products. We were founded in 2008, and we have been developing and providing a cloud-based platform that enables developers and organizations to integrate voice, messaging and video communications capabilities into their software applications. This market is relatively new and unproven and is subject to a number of risks and uncertainties. We believe that our revenue currently constitutes a significant portion of the total revenue in this market, and therefore, we believe that our future success will depend in large part on the growth, if any, of this market. The utilization of APIs by developers and organizations to build communications functionality into their applications is still relatively new, and developers and organizations may not recognize the need for, or benefits of, our products and platform. Moreover, if they do not recognize the need for and benefits of our products and platform, they may decide to adopt alternative products and services to satisfy some portion of their business needs. In order to grow our business and extend our market position, we intend to focus on educating developers and other potential customers about the benefits of our products and platform, expanding the functionality of our products and bringing new technologies to market to increase market acceptance and use of our platform. Our ability to expand the market that our products and platform address depends upon a number of factors, including the cost, performance and perceived value associated with such products and platform. The market for our products and platform could fail to grow significantly or there could be a reduction in demand for our products as a result of a lack of developer acceptance, technological challenges, competing products and services, decreases in spending by current and prospective customers, weakening economic conditions and other causes. If our market does not experience significant growth or demand for our products decreases, then our business, results of operations and financial condition could be adversely affected. We have a history of losses and we are uncertain about our future profitability. We have incurred net losses in each year since our inception, including net losses of $63.7 million, $41.3 million and $35.5 million in 2017, 2016 and 2015, respectively. We had an accumulated deficit of $250.4 million as of December 31, 2017. We expect to continue to expend substantial financial and other resources on, among other things: • investments in our engineering team, the development of new products, features and functionality and enhancements to our platform; • sales and marketing, including the continued expansion of our direct sales organization and marketing programs, especially for enterprises and for organizations outside of the United States, and expanding our programs directed at increasing our brand awareness among current and new developers; • expansion of our operations and infrastructure, both domestically and internationally; and 19 F o r m 1 0 - K • general administration, including legal, accounting and other expenses related to being a public company. These investments may not result in increased revenue or growth of our business. We also expect that our revenue growth rate will decline over time. Accordingly, we may not be able to generate sufficient revenue to offset our expected cost increases and achieve and sustain profitability. If we fail to achieve and sustain profitability, then our business, results of operations and financial condition would be adversely affected. We have experienced rapid growth and expect our growth to continue, and if we fail to effectively manage our growth, then our business, results of operations and financial condition could be adversely affected. We have experienced substantial growth in our business since inception. For example, our headcount has grown from 730 employees on December 31, 2016 to 996 employees on December 31, 2017. In addition, we are rapidly expanding our international operations. Our international headcount grew from 125 employees as of December 31, 2016 to 215 employees as of December 31, 2017, and we established operations in one new country within that same period. We expect to continue to expand our international operations in the future. We have also experienced significant growth in the number of customers, usage and amount of data that our platform and associated infrastructure support. This growth has placed and may continue to place significant demands on our corporate culture, operational infrastructure and management. We believe that our corporate culture has been a critical component of our success. We have invested substantial time and resources in building our team and nurturing our culture. As we expand our business and mature as a public company, we may find it difficult to maintain our corporate culture while managing this growth. Any failure to manage our anticipated growth and organizational changes in a manner that preserves the key aspects of our culture could hurt our chance for future success, including our ability to recruit and retain personnel, and effectively focus on and pursue our corporate objectives. This, in turn, could adversely affect our business, results of operations and financial condition. In addition, in order to successfully manage our rapid growth, our organizational structure has become more complex. In order to manage these increasing complexities, we will need to continue to scale and adapt our operational, financial and management controls, as well as our reporting systems and procedures. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and management resources before our revenue increases and without any assurances that our revenue will increase. Finally, continued growth could strain our ability to maintain reliable service levels for our customers. If we fail to achieve the necessary level of efficiency in our organization as we grow, then our business, results of operations and financial condition could be adversely affected. Our quarterly results may fluctuate, and if we fail to meet securities analysts’ and investors’ expectations, then the trading price of our Class A common stock and the value of your investment could decline substantially. Our results of operations, including the levels of our revenue, cost of revenue, gross margin and operating expenses, have fluctuated from quarter to quarter in the past and may continue to vary significantly in the future. These fluctuations are a result of a variety of factors, many of which are outside of our control, may be difficult to predict and may or may not fully reflect the underlying performance of our business. If our quarterly results of operations fall below the expectations of investors or securities analysts, then the trading price of our Class A common stock could decline 20 substantially. Some of the important factors that may cause our results of operations to fluctuate from quarter to quarter include: • our ability to retain and increase revenue from existing customers and attract new customers; • fluctuations in the amount of revenue from our Variable Customer Accounts and our larger Base Customer Accounts; • our ability to attract and retain enterprises and international organizations as customers; • our ability to introduce new products and enhance existing products; • competition and the actions of our competitors, including pricing changes and the introduction of new products, services and geographies; • the number of new employees; • changes in network service provider fees that we pay in connection with the delivery of communications on our platform; • changes in cloud infrastructure fees that we pay in connection with the operation of our platform; • changes in our pricing as a result of our optimization efforts or otherwise; • reductions in pricing as a result of negotiations with our larger customers; • the rate of expansion and productivity of our sales force, including our enterprise sales force, which has been a focus of our recent expansion efforts; • change in the mix of products that our customers use; • change in the revenue mix of U.S. and international products; • changes in laws, regulations or regulatory enforcement, in the United States or internationally, that impact our ability to market, sell or deliver our products; • the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business, including investments in our international expansion; • significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our products on our platform; • the timing of customer payments and any difficulty in collecting accounts receivable from customers; • general economic conditions that may adversely affect a prospective customer’s ability or willingness to adopt our products, delay a prospective customer’s adoption decision, reduce the revenue that we generate from the use of our products or affect customer retention; • changes in foreign currency exchange rates; • extraordinary expenses such as litigation or other dispute-related settlement payments; • sales tax and other tax determinations by authorities in the jurisdictions in which we conduct business; • the impact of new accounting pronouncements; • expenses in connection with mergers, acquisitions or other strategic transactions; and • fluctuations in stock-based compensation expense. 21 F o r m 1 0 - K The occurrence of one or more of the foregoing and other factors may cause our results of operations to vary significantly. As such, we believe that quarter-to-quarter comparisons of our results of operations may not be meaningful and should not be relied upon as an indication of future performance. In addition, a significant percentage of our operating expenses is fixed in nature and is based on forecasted revenue trends. Accordingly, in the event of a revenue shortfall, we may not be able to mitigate the negative impact on our income (loss) and margins in the short term. If we fail to meet or exceed the expectations of investors or securities analysts, then the trading price of our Class A common stock could fall substantially, and we could face costly lawsuits, including securities class action suits. Additionally, certain large scale events, such as major elections and sporting events, can significantly impact usage levels on our platform, which could cause fluctuations in our results of operations. We expect that significantly increased usage of all communications platforms, including ours, during certain seasonal and one-time events could impact delivery and quality of our products during those events. We also experienced increased expenses in the second quarter of 2017 due to our developer conference, SIGNAL, which we plan to host in the fourth quarter of 2018 and plan to host annually. Such annual and one-time events may cause fluctuations in our results of operations and may impact both our revenue and operating expenses. If we are not able to maintain and enhance our brand and increase market awareness of our company and products, then our business, results of operations and financial condition may be adversely affected. We believe that maintaining and enhancing the ‘‘Twilio’’ brand identity and increasing market awareness of our company and products, particularly among developers, is critical to achieving widespread acceptance of our platform, to strengthen our relationships with our existing customers and to our ability to attract new customers. The successful promotion of our brand will depend largely on our continued marketing efforts, our ability to continue to offer high quality products, our ability to be thought leaders in the cloud communications market and our ability to successfully differentiate our products and platform from competing products and services. Our brand promotion and thought leadership activities may not be successful or yield increased revenue. In addition, independent industry analysts often provide reviews of our products and competing products and services, which may significantly influence the perception of our products in the marketplace. If these reviews are negative or not as strong as reviews of our competitors’ products and services, then our brand may be harmed. From time to time, our customers have complained about our products, such as complaints about our pricing and customer support. If we do not handle customer complaints effectively, then our brand and reputation may suffer, our customers may lose confidence in us and they may reduce or cease their use of our products. In addition, many of our customers post and discuss on social media about Internet-based products and services, including our products and platform. Our success depends, in part, on our ability to generate positive customer feedback and minimize negative feedback on social media channels where existing and potential customers seek and share information. If actions we take or changes we make to our products or platform upset these customers, then their online commentary could negatively affect our brand and reputation. Complaints or negative publicity about us, our products or our platform could materially and adversely impact our ability to attract and retain customers, our business, results of operations and financial condition. The promotion of our brand also requires us to make substantial expenditures, and we anticipate that these expenditures will increase as our market becomes more competitive and as we expand into new markets. To the extent that these activities increase revenue, this revenue still may not be enough to offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, then our business may not grow, we may see our pricing power reduced relative to competitors and we may lose customers, all of which would adversely affect our business, results of operations and financial condition. 22 Our business depends on customers increasing their use of our products, and any loss of customers or decline in their use of our products could materially and adversely affect our business, results of operations and financial condition. Our ability to grow and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with existing customers and to have them increase their usage of our platform. If our customers do not increase their use of our products, then our revenue may decline and our results of operations may be harmed. For example, Uber, our largest Base Customer, decreased its usage of our products throughout 2017, which will result in decreased revenues from this customer versus recent historical periods. Customers are charged based on the usage of our products. Most of our customers do not have long-term contractual financial commitments to us and, therefore, most of our customers may reduce or cease their use of our products at any time without penalty or termination charges. Customers may terminate or reduce their use of our products for any number of reasons, including if they are not satisfied with our products, the value proposition of our products or our ability to meet their needs and expectations. We cannot accurately predict customers’ usage levels and the loss of customers or reductions in their usage levels of our products may each have a negative impact on our business, results of operations and financial condition and may cause our Dollar-Based Net Expansion Rate to decline in the future if customers are not satisfied with our products, the value proposition of our products or our ability to meet their needs and expectations. If a significant number of customers cease using, or reduce their usage of our products, then we may be required to spend significantly more on sales and marketing than we currently plan to spend in order to maintain or increase revenue from customers. Such additional sales and marketing expenditures could adversely affect our business, results of operations and financial condition. If we are unable to attract new customers in a cost-effective manner, then our business, results of operations and financial condition would be adversely affected. In order to grow our business, we must continue to attract new customers in a cost-effective manner. We use a variety of marketing channels to promote our products and platform, such as developer events and developer evangelism, as well as search engine marketing and optimization. We periodically adjust the mix of our other marketing programs such as regional customer events, email campaigns, billboard advertising and public relations initiatives. If the costs of the marketing channels we use increase dramatically, then we may choose to use alternative and less expensive channels, which may not be as effective as the channels we currently use. As we add to or change the mix of our marketing strategies, we may need to expand into more expensive channels than those we are currently in, which could adversely affect our business, results of operations and financial condition. We will incur marketing expenses before we are able to recognize any revenue that the marketing initiatives may generate, and these expenses may not result in increased revenue or brand awareness. We have made in the past, and may make in the future, significant expenditures and investments in new marketing campaigns, and we cannot guarantee that any such investments will lead to the cost-effective acquisition of additional customers. If we are unable to maintain effective marketing programs, then our ability to attract new customers could be materially and adversely affected, our advertising and marketing expenses could increase substantially and our results of operations may suffer. If we do not develop enhancements to our products and introduce new products that achieve market acceptance, our business, results of operations and financial condition could be adversely affected. Our ability to attract new customers and increase revenue from existing customers depends in part on our ability to enhance and improve our existing products, increase adoption and usage of our products and introduce new products. The success of any enhancements or new products depends on several factors, including timely completion, adequate quality testing, actual performance quality, market-accepted pricing levels and overall market acceptance. Enhancements and new products that we 23 F o r m 1 0 - K develop may not be introduced in a timely or cost-effective manner, may contain errors or defects, may have interoperability difficulties with our platform or other products or may not achieve the broad market acceptance necessary to generate significant revenue. Furthermore, our ability to increase the usage of our products depends, in part, on the development of new use cases for our products, which is typically driven by our developer community and may be outside of our control. We also have invested, and may continue to invest, in the acquisition of complementary businesses, technologies, services, products and other assets that expand the products that we can offer our customers. We may make these investments without being certain that they will result in products or enhancements that will be accepted by existing or prospective customers. Our ability to generate usage of additional products by our customers may also require increasingly sophisticated and more costly sales efforts and result in a longer sales cycle. If we are unable to successfully enhance our existing products to meet evolving customer requirements, increase adoption and usage of our products, develop new products, or if our efforts to increase the usage of our products are more expensive than we expect, then our business, results of operations and financial condition would be adversely affected. If we are unable to increase adoption of our products by enterprises, our business, results of operations and financial condition may be adversely affected. Historically, we have relied on the adoption of our products by software developers through our self-service model for a significant majority of our revenue, and we currently generate only a small portion of our revenue from enterprise customers. Our ability to increase our customer base, especially among enterprises, and achieve broader market acceptance of our products will depend, in part, on our ability to effectively organize, focus and train our sales and marketing personnel. We have limited experience selling to enterprises and only recently established an enterprise-focused sales force. Our ability to convince enterprises to adopt our products will depend, in part, on our ability to attract and retain sales personnel with experience selling to enterprises. We believe that there is significant competition for experienced sales professionals with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth in the future will depend, in part, on our ability to recruit, train and retain a sufficient number of experienced sales professionals, particularly those with experience selling to enterprises. In addition, even if we are successful in hiring qualified sales personnel, new hires require significant training and experience before they achieve full productivity, particularly for sales efforts targeted at enterprises and new territories. Our recent hires and planned hires may not become as productive as quickly as we expect and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business. Because we do not have a long history of targeting our sales efforts at enterprises, we cannot predict whether, or to what extent, our sales will increase as we organize and train our sales force or how long it will take for sales personnel to become productive. As we seek to increase the adoption of our products by enterprises, we expect to incur higher costs and longer sales cycles. In this market segment, the decision to adopt our products may require the approval of multiple technical and business decision makers, including security, compliance, procurement, operations and IT. In addition, while enterprise customers may quickly deploy our products on a limited basis, before they will commit to deploying our products at scale, they often require extensive education about our products and significant customer support time, engage in protracted pricing negotiations and seek to secure readily available development resources. In addition, sales cycles for enterprises are inherently more complex and less predictable than the sales through our self-service model, and some enterprise customers may not use our products enough to generate revenue that justifies the cost to obtain such customers. In addition, these complex and resource intensive sales efforts could place additional strain on our product and engineering resources. Further, enterprises, including some of our customers, may choose to develop their own solutions that do not include our products. They also may demand reductions in pricing as their usage of our products 24 increases, which could have an adverse impact on our gross margin. As a result of our limited experience selling and marketing to enterprises, our efforts to sell to these potential customers may not be successful. If we are unable to increase the revenue that we derive from enterprises, then our business, results of operations and financial condition may be adversely affected. If we are unable to expand our relationships with existing Solution Partner customers and add new Solution Partner customers, our business, results of operations and financial condition could be adversely affected. We believe that the continued growth of our business depends in part upon developing and expanding strategic relationships with Solution Partner customers. Solution Partner customers embed our software products in their solutions, such as software applications for contact centers and sales force and marketing automation, and then sell such solutions to other businesses. When potential customers do not have the available developer resources to build their own applications, we refer them to our network of Solution Partner customers. As part of our growth strategy, we intend to expand our relationships with existing Solution Partner customers and add new Solution Partner customers. If we fail to expand our relationships with existing Solution Partner customers or establish relationships with new Solution Partner customers in a timely and cost-effective manner, or at all, then our business, results of operations and financial condition could be adversely affected. Additionally, even if we are successful at building these relationships but there are problems or issues with integrating our products into the solutions of these customers, our reputation and ability to grow our business may be harmed. We rely upon Amazon Web Services to operate our platform, and any disruption of or interference with our use of Amazon Web Services would adversely affect our business, results of operations and financial condition. We outsource substantially all of our cloud infrastructure to Amazon Web Services (‘‘AWS’’), which hosts our products and platform. Our customers need to be able to access our platform at any time, without interruption or degradation of performance. AWS runs its own platform that we access, and we are, therefore, vulnerable to service interruptions at AWS. We have experienced, and expect that in the future we may experience interruptions, delays and outages in service and availability due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions and capacity constraints. Capacity constraints could be due to a number of potential causes, including technical failures, natural disasters, fraud or security attacks. For instance, in September 2015, AWS suffered a significant outage that had a widespread impact on the ability of our customers to use several of our products. In addition, if our security, or that of AWS, is compromised, or our products or platform are unavailable or our users are unable to use our products within a reasonable amount of time or at all, then our business, results of operations and financial condition could be adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It may become increasingly difficult to maintain and improve our platform performance, especially during peak usage times, as our products become more complex and the usage of our products increases. To the extent that we do not effectively address capacity constraints, either through AWS or alternative providers of cloud infrastructure, our business, results of operations and financial condition may be adversely affected. In addition, any changes in service levels from AWS may adversely affect our ability to meet our customers’ requirements. The substantial majority of the services we use from AWS are for cloud-based server capacity and, to a lesser extent, storage and other optimization offerings. AWS enables us to order and reserve server capacity in varying amounts and sizes distributed across multiple regions. We access AWS infrastructure through standard IP connectivity. AWS provides us with computing and storage capacity pursuant to an agreement that continues until terminated by either party. AWS may terminate the agreement by providing 30 days prior written notice, and it may in some cases terminate the agreement immediately for cause upon notice. Although we expect that we could receive similar services from other third parties, if any of our arrangements with AWS are terminated, we could experience interruptions on our platform and in our ability to make our products available to customers, as well as delays and additional expenses in arranging alternative cloud infrastructure services. 25 F o r m 1 0 - K Any of the above circumstances or events may harm our reputation, cause customers to stop using our products, impair our ability to increase revenue from existing customers, impair our ability to grow our customer base, subject us to financial penalties and liabilities under our service level agreements and otherwise harm our business, results of operations and financial condition. To deliver our products, we rely on network service providers for our network service. We currently interconnect with network service providers around the world to enable the use by our customers of our products over their networks. We expect that we will continue to rely heavily on network service providers for these services going forward. Our reliance on network service providers has reduced our operating flexibility, ability to make timely service changes and control quality of service. In addition, the fees that we are charged by network service providers may change daily or weekly, while we do not typically change our customers’ pricing as rapidly. Furthermore, many of these network service providers do not have long-term committed contracts with us and may terminate their agreements with us without notice or restriction. If a significant portion of our network service providers stop providing us with access to their infrastructure, fail to provide these services to us on a cost-effective basis, cease operations, or otherwise terminate these services, the delay caused by qualifying and switching to other network service providers could be time consuming and costly and could adversely affect our business, results of operations and financial condition. Further, if problems occur with our network service providers, it may cause errors or poor quality communications with our products, and we could encounter difficulty identifying the source of the problem. The occurrence of errors or poor quality communications on our products, whether caused by our platform or a network service provider, may result in the loss of our existing customers or the delay of adoption of our products by potential customers and may adversely affect our business, results of operations and financial condition. Our future success depends in part on our ability to drive the adoption of our products by international customers. In 2017, 2016 and 2015, we derived 23%, 16% and 14% of our revenue, respectively, from customer accounts located outside the United States. The future success of our business will depend, in part, on our ability to expand our customer base worldwide. While we have been rapidly expanding our sales efforts internationally, our experience in selling our products outside of the United States is limited. Furthermore, our developer-first business model may not be successful or have the same traction outside the United States. As a result, our investment in marketing our products to these potential customers may not be successful. If we are unable to increase the revenue that we derive from international customers, then our business, results of operations and financial condition may be adversely affected. We are in the process of expanding our international operations, which exposes us to significant risks. We are continuing to expand our international operations to increase our revenue from customers outside of the United States as part of our growth strategy. Between December 31, 2016 and December 31, 2017, our international headcount grew from 125 employees to 215 employees, and we opened one new office outside of the United States. We expect to open additional foreign offices and hire employees to work at these offices in order to reach new customers and gain access to additional technical talent. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks in addition to those we already face in the United States. Because of our limited experience with international operations or with developing and managing sales in international markets, our international expansion efforts may not be successful. 26 In addition, we will face risks in doing business internationally that could adversely affect our business, including: • exposure to political developments in the United Kingdom (‘‘U.K.’’), including the planned departure of the U.K. from the European Union (EU) in March 2019, which has created an uncertain political and economic environment, instability for businesses and volatility in global financial markets; • the difficulty of managing and staffing international operations and the increased operations, travel, infrastructure and legal compliance costs associated with numerous international locations; • our ability to effectively price our products in competitive international markets; • new and different sources of competition; • our ability to comply with the General Data Protection Regulation (‘‘GDPR’’), which will go into effect on May 25, 2018; • potentially greater difficulty collecting accounts receivable and longer payment cycles; • higher or more variable network service provider fees outside of the United States; • the need to adapt and localize our products for specific countries; • the need to offer customer support in various languages; • difficulties in understanding and complying with local laws, regulations and customs in foreign jurisdictions; • difficulties with differing technical and environmental standards, data privacy and telecommunications regulations and certification requirements outside the United States, which could prevent customers from deploying our products or limit their usage; • export controls and economic sanctions administered by the Department of Commerce Bureau of Industry and Security and the Treasury Department’s Office of Foreign Assets Control; • compliance with various anti-bribery and anti-corruption laws such as the Foreign Corrupt Practices Act and United Kingdom Bribery Act of 2010; • tariffs and other non-tariff barriers, such as quotas and local content rules; • more limited protection for intellectual property rights in some countries; • adverse tax consequences; • fluctuations in currency exchange rates, which could increase the price of our products outside of the United States, increase the expenses of our international operations and expose us to foreign currency exchange rate risk; • currency control regulations, which might restrict or prohibit our conversion of other currencies into U.S. dollars; • restrictions on the transfer of funds; • deterioration of political relations between the United States and other countries; and • political or social unrest or economic instability in a specific country or region in which we operate, which could have an adverse impact on our operations in that location. Also, due to costs from our international expansion efforts and network service provider fees outside of the United States, which generally are higher than domestic rates, our gross margin for 27 F o r m 1 0 - K international customers is typically lower than our gross margin for domestic customers. As a result, our gross margin may be impacted and fluctuate as we expand our operations and customer base worldwide. Our failure to manage any of these risks successfully could harm our international operations, and adversely affect our business, results of operations and financial condition. We currently generate significant revenue from our largest customers, and the loss or decline in revenue from any of these customers could harm our business, results of operations and financial condition. In 2017, 2016 and 2015, our 10 largest Active Customer Accounts generated an aggregate of 19%, 30% and 32% of our revenue, respectively. In addition, a significant portion of our revenue comes from two customers, one of which is a Variable Customer Account. In 2017, 2016 and 2015, WhatsApp, a Variable Customer, accounted for 6%, 9% and 17% of our revenue, respectively. WhatsApp uses our Programmable Voice products and Programmable Messaging products in its applications to verify new and existing users on its service. Our Variable Customer Accounts, including WhatsApp, do not have long-term contracts with us and may reduce or fully terminate their usage of our products at any time without notice, penalty or termination charges. In addition, the usage of our products by WhatsApp and other Variable Customer Accounts may change significantly between periods. In 2017, 2016 and 2015, a second customer, Uber, a Base Customer, accounted for 8%, 14% and 9% of our revenue, respectively. Uber uses our Programmable Messaging products and Programmable Voice products. Uber, or any other one of our Base Customers, could significantly reduce their usage of our products without notice or penalty. Uber decreased its usage of our products throughout 2017 and may continue to do so in the future. In the event that our large customers do not continue to use our products, use fewer of our products, or use our products in a more limited capacity, or not at all, our business, results of operations and financial condition could be adversely affected. The market in which we participate is intensely competitive, and if we do not compete effectively, our business, results of operations and financial condition could be harmed. The market for cloud communications is rapidly evolving, significantly fragmented and highly competitive, with relatively low barriers to entry in some segments. The principal competitive factors in our market include completeness of offering, credibility with developers, global reach, ease of integration and programmability, product features, platform scalability, reliability, security and performance, brand awareness and reputation, the strength of sales and marketing efforts, customer support, as well as the cost of deploying and using our products. Our competitors fall into four primary categories: • legacy on-premise vendors, such as Avaya and Cisco; • regional network service providers that offer limited developer functionality on top of their own physical infrastructure; • smaller software companies that compete with portions of our product line; and • SaaS companies that offer prepackaged applications for a narrow set of use cases. Some of our competitors and potential competitors are larger and have greater name recognition, longer operating histories, more established customer relationships, larger budgets and significantly greater resources than we do. In addition, they have the operating flexibility to bundle competing products and services at little or no perceived incremental cost, including offering them at a lower price 28 as part of a larger sales transaction. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices, with greater depth than our products or in different geographies. Our current and potential competitors may develop and market new products and services with comparable functionality to our products, and this could lead to us having to decrease prices in order to remain competitive. Customers utilize our products in many ways and use varying levels of functionality that our products offer or are capable of supporting or enabling within their applications. Customers that use many of the features of our products or use our products to support or enable core functionality for their applications may have difficulty or find it impractical to replace our products with a competitor’s products or services, while customers that use only limited functionality may be able to more easily replace our products with competitive offerings. Our customers also may choose to build some of the functionality our products provide, which may limit or eliminate their demand for our products. With the introduction of new products and services and new market entrants, we expect competition to intensify in the future. In addition, some of our customers may choose to use our products and our competitors’ products at the same time. Further, customers and consumers may choose to adopt other forms of electronic communications or alternative communication platforms. Moreover, as we expand the scope of our products, we may face additional competition. If one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could also adversely affect our ability to compete effectively. In addition, some of our competitors have lower list prices than us, which may be attractive to certain customers even if those products have different or lesser functionality. If we are unable to maintain our current pricing due to competitive pressures, our margins will be reduced and our business, results of operations and financial condition would be adversely affected. In addition, pricing pressures and increased competition generally could result in reduced revenue, reduced margins, increased losses or the failure of our products to achieve or maintain widespread market acceptance, any of which could harm our business, results of operations and financial condition. We have a limited operating history, which makes it difficult to evaluate our current business and future prospects and increases the risk of your investment. We were founded and launched our first product in 2008. As a result of our limited operating history, our ability to forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to plan for future growth. Our historical revenue growth should not be considered indicative of our future performance. We have encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as: • market acceptance of our products and platform; • adding new customers, particularly enterprises; • retention of customers; • the successful expansion of our business, particularly in markets outside of the United States; • competition; • our ability to control costs, particularly our operating expenses; • network outages or security breaches and any associated expenses; • foreign currency exchange rate fluctuations; 29 F o r m 1 0 - K • executing acquisitions and integrating the acquired businesses, technologies, services, products and other assets; and • general economic and political conditions. If we do not address these risks successfully, our business, results of operations and financial condition could be adversely affected. We have limited experience with respect to determining the optimal prices for our products. We charge our customers based on their use of our products. We expect that we may need to change our pricing from time to time. In the past we have sometimes reduced our prices either for individual customers in connection with long-term agreements or for a particular product. One of the challenges to our pricing is that the fees that we pay to network service providers over whose networks we transmit communications can vary daily or weekly and are affected by volume and other factors that may be outside of our control and difficult to predict. This can result in us incurring increased costs that we may be unable or unwilling to pass through to our customers, which could adversely impact our business, results of operations and financial condition. Further, as competitors introduce new products or services that compete with ours or reduce their prices, we may be unable to attract new customers or retain existing customers based on our historical pricing. As we expand internationally, we also must determine the appropriate price to enable us to compete effectively internationally. Moreover, enterprises, which are a primary focus for our direct sales efforts, may demand substantial price concessions. In addition, if the mix of products sold changes, including for a shift to IP-based products, then we may need to, or choose to, revise our pricing. As a result, in the future we may be required or choose to reduce our prices or change our pricing model, which could adversely affect our business, results of operations and financial condition. We typically provide monthly uptime service level commitments of up to 99.95% under our agreements with customers. If we fail to meet these contractual commitments, then our business, results of operations and financial condition could be adversely affected. Our agreements with customers typically provide for service level commitments. If we suffer extended periods of downtime for our products or platform and we are unable to meet these commitments, then we are contractually obligated to provide a service credit, which is typically 10% of the customer’s amounts due for the month in question. In addition, the performance and availability of AWS, which provides our cloud infrastructures is outside of our control and, therefore, we are not in full control of whether we meet our service level commitments. As a result, our business, results of operations and financial condition could be adversely affected if we suffer unscheduled downtime that exceeds the service level commitments we have made to our customers. Any extended service outages could adversely affect our business and reputation. Breaches of our networks or systems, or those of AWS or our network service providers, could degrade our ability to conduct our business, compromise the integrity of our products and platform, result in significant data losses and the theft of our intellectual property, damage our reputation, expose us to liability to third parties and require us to incur significant additional costs to maintain the security of our networks and data. We depend upon our IT systems to conduct virtually all of our business operations, ranging from our internal operations and research and development activities to our marketing and sales efforts and communications with our customers and business partners. Individuals or entities may attempt to penetrate our network security, or that of our platform, and to cause harm to our business operations, including by misappropriating our proprietary information or that of our customers, employees and business partners or to cause interruptions of our products and platform. Because the techniques used by such individuals or entities to access, disrupt or sabotage devices, systems and networks change 30 frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques, and we may not become aware in a timely manner of such a security breach, which could exacerbate any damage we experience. Additionally, we depend upon our employees and contractors to appropriately handle confidential and sensitive data, including customer data, and to deploy our IT resources in a safe and secure manner that does not expose our network systems to security breaches or the loss of data. Any data security incidents, including internal malfeasance by our employees, unauthorized access or usage, virus or similar breach or disruption of us or our service providers, such as AWS or network service providers, could result in loss of confidential information, damage to our reputation, loss of customers, litigation, regulatory investigations, fines, penalties and other liabilities. Accordingly, if our cybersecurity measures or those of AWS or our network service providers, fail to protect against unauthorized access, attacks (which may include sophisticated cyberattacks) or the mishandling of data by our employees and contractors, then our reputation, business, results of operations and financial condition could be adversely affected. Defects or errors in our products could diminish demand for our products, harm our business and results of operations and subject us to liability. Our customers use our products for important aspects of their businesses, and any errors, defects or disruptions to our products and any other performance problems with our products could damage our customers’ businesses and, in turn, hurt our brand and reputation. We provide regular updates to our products, which have in the past contained, and may in the future contain, undetected errors, failures, vulnerabilities and bugs when first introduced or released. Real or perceived errors, failures or bugs in our products could result in negative publicity, loss of or delay in market acceptance of our platform, loss of competitive position, lower customer retention or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem. In addition, we may not carry insurance sufficient to compensate us for any losses that may result from claims arising from defects or disruptions in our products. As a result, our reputation and our brand could be harmed, and our business, results of operations and financial condition may be adversely affected. If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations, and changing customer needs, requirements or preferences, our products may become less competitive. The market for communications in general, and cloud communications in particular, is subject to rapid technological change, evolving industry standards, changing regulations, as well as changing customer needs, requirements and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these changes on a timely basis. If we are unable to develop new products that satisfy our customers and provide enhancements and new features for our existing products that keep pace with rapid technological and industry change, our business, results of operations and financial condition could be adversely affected. If new technologies emerge that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete effectively. Our platform must integrate with a variety of network, hardware, mobile and software platforms and technologies, and we need to continuously modify and enhance our products and platform to adapt to changes and innovation in these technologies. If customers adopt new software platforms or infrastructure, we may be required to develop new versions of our products to work with those new platforms or infrastructure. This development effort may require significant resources, which would adversely affect our business, results of operations and financial condition. Any failure of our products and platform to operate effectively with evolving or new platforms and technologies could reduce the demand for our products. If we are unable to respond to these changes in a cost-effective manner, our 31 F o r m 1 0 - K products may become less marketable and less competitive or obsolete, and our business, results of operations and financial condition could be adversely affected. Our reliance on SaaS technologies from third parties may adversely affect our business, results of operations and financial condition. We rely heavily on hosted SaaS technologies from third parties in order to operate critical internal functions of our business, including enterprise resource planning, customer support and customer relations management services. If these services become unavailable due to extended outages or interruptions, or because they are no longer available on commercially reasonable terms or prices, our expenses could increase. As a result, our ability to manage our operations could be interrupted and our processes for managing our sales process and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business, results of operations and financial condition. If we are unable to develop and maintain successful relationships with independent software vendors and system integrators, our business, results of operations and financial condition could be adversely affected. We believe that continued growth of our business depends in part upon identifying, developing and maintaining strategic relationships with independent software vendor development platforms and system integrators. As part of our growth strategy, we plan to further develop product partnerships with ISV development platforms to embed our products as additional distribution channels and also intend to further develop partnerships and specific solution areas with systems integrators. If we fail to establish these relationships in a timely and cost-effective manner, or at all, then our business, results of operations and financial condition could be adversely affected. Additionally, even if we are successful at developing these relationships but there are problems or issues with the integrations or enterprises are not willing to purchase through ISV development platforms, our reputation and ability to grow our business may be adversely affected. Any failure to offer high quality customer support may adversely affect our relationships with our customers and prospective customers, and adversely affect our business, results of operations and financial condition. Many of our customers depend on our customer support team to assist them in deploying our products effectively to help them to resolve post-deployment issues quickly and to provide ongoing support. If we do not devote sufficient resources or are otherwise unsuccessful in assisting our customers effectively, it could adversely affect our ability to retain existing customers and could prevent prospective customers from adopting our products. We may be unable to respond quickly enough to accommodate short-term increases in demand for customer support. We also may be unable to modify the nature, scope and delivery of our customer support to compete with changes in the support services provided by our competitors. Increased demand for customer support, without corresponding revenue, could increase costs and adversely affect our business, results of operations and financial condition. Our sales are highly dependent on our business reputation and on positive recommendations from developers. Any failure to maintain high quality customer support, or a market perception that we do not maintain high quality customer support, could adversely affect our reputation, business, results of operations and financial condition. We have been sued, and may, in the future, be sued by third parties for alleged infringement of their proprietary rights, which could adversely affect our business, results of operations and financial condition. There is considerable patent and other intellectual property development activity in our industry. Our future success depends, in part, on not infringing the intellectual property rights of others. Our competitors or other third parties have claimed and may, in the future, claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. For 32 example, on April 30, 2015, Telesign Corporation (‘‘Telesign’’), filed a lawsuit against us in the United States District Court, Central District of California (‘‘Telesign I’’). Telesign alleges that we are infringing three U.S. patents that it holds: U.S. Patent No. 8,462,920 (‘‘‘ 920’’), U.S. Patent No. 8,687,038 (‘‘‘ 038’’) and U.S. Patent No. 7,945,034 (‘‘‘ 034’’). The patent infringement allegations in the lawsuit relate to our Account Security products, our two-factor authentication use case and an API tool to find information about a phone number. Subsequently, on March 28, 2016, Telesign filed a second lawsuit against us in the United States District Court, Central District of California (‘‘Telesign II’’), alleging infringement of U.S. Patent No. 9,300,792 (‘‘‘792’’) held by Telesign. The ‘792 patent is in the same patent family as the ‘920 and ‘038 patents asserted in Telesign I, and the infringement allegations in Telesign II relate to our Account Security products and our two-factor authentication use case. With respect to each of the patents asserted in Telesign I and Telesign II, the complaints seek, among other things, to enjoin us from allegedly infringing these patents along with damages for lost profits. See the section titled ‘‘Item 3. Legal Proceedings.’’ We intend to vigorously defend ourselves against these lawsuits and believe we have meritorious defenses to each matter in which we are a defendant. However, litigation is inherently uncertain, and any judgment or injunctive relief entered against us or any adverse settlement could negatively affect our business, results of operations and financial condition. In addition, litigation can involve significant management time and attention and be expensive, regardless of outcome. During the course of these lawsuits, there may be announcements of the results of hearings and motions and other interim developments related to the litigation. If securities analysts or investors regard these announcements as negative, the trading price of our Class A common stock may decline. In the future, we may receive claims from third parties, including our competitors, that our products or platform and underlying technology infringe or violate a third party’s intellectual property rights, and we may be found to be infringing upon such rights. We may be unaware of the intellectual property rights of others that may cover some or all of our technology. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our products, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to obtain licenses or modify our products or platform, which could further exhaust our resources. Even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding intellectual property could be costly and time-consuming and divert the attention of our management and other employees from our business. Patent infringement, trademark infringement, trade secret misappropriation and other intellectual property claims and proceedings brought against us, whether successful or not, could harm our brand, business, results of operations and financial condition. Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses. Our agreements with customers and other third parties typically include indemnification or other provisions under which we agree to indemnify or otherwise be liable to them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons or other liabilities relating to or arising from our products or platform or other acts or omissions. The term of these contractual provisions often survives termination or expiration of the applicable agreement. Large indemnity payments or damage claims from contractual breach could harm our business, results of operations and financial condition. Although typically we contractually limit our liability with respect to such obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other current and prospective customers, demand for our products and adversely affect our business, results of operations and financial condition. 33 F o r m 1 0 - K We could incur substantial costs in protecting or defending our intellectual property rights, and any failure to protect our intellectual property could adversely affect our business, results of operations and financial condition. Our success depends, in part, on our ability to protect our brand and the proprietary methods and technologies that we develop under patent and other intellectual property laws of the United States and foreign jurisdictions so that we can prevent others from using our inventions and proprietary information. As of December 31, 2017, in the United States, we had been issued 77 patents, which expire between 2029 and 2036, and had 42 patent applications pending for examination and three pending provisional applications. As of such date, we also had seven issued patents and seven patent applications pending for examination in foreign jurisdictions, all of which are related to U.S. patents and patent applications. There can be no assurance that additional patents will be issued or that any patents that have been issued or that may be issued in the future will provide significant protection for our intellectual property. As of December 31, 2017, we had 14 registered trademarks in the United States and 61 registered trademarks in foreign jurisdictions. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology and our business, results of operations and financial condition may be adversely affected. There can be no assurance that the particular forms of intellectual property protection that we seek, including business decisions about when to file patent applications and trademark applications, will be adequate to protect our business. We could be required to spend significant resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights, determine the validity and scope of our proprietary rights or those of others, or defend against claims of infringement or invalidity. Such litigation could be costly, time-consuming and distracting to management, result in a diversion of significant resources, the narrowing or invalidation of portions of our intellectual property and have an adverse effect on our business, results of operations and financial condition. Our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights or alleging that we infringe the counterclaimant’s own intellectual property. Any of our patents, copyrights, trademarks or other intellectual property rights could be challenged by others or invalidated through administrative process or litigation. We also rely, in part, on confidentiality agreements with our business partners, employees, consultants, advisors, customers and others in our efforts to protect our proprietary technology, processes and methods. These agreements may not effectively prevent disclosure of our confidential information, and it may be possible for unauthorized parties to copy our software or other proprietary technology or information, or to develop similar software independently without our having an adequate remedy for unauthorized use or disclosure of our confidential information. In addition, others may independently discover our trade secrets and proprietary information, and in these cases we would not be able to assert any trade secret rights against those parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position. In addition, the laws of some countries do not protect intellectual property and other proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying, transfer and use of our proprietary technology or information may increase. We cannot be certain that our means of protecting our intellectual property and proprietary rights will be adequate or that our competitors will not independently develop similar technology. If we fail to meaningfully protect our intellectual property and proprietary rights, our business, results of operations and financial condition could be adversely affected. 34 Our use of open source software could negatively affect our ability to sell our products and subject us to possible litigation. Our products and platform incorporate open source software, and we expect to continue to incorporate open source software in our products and platform in the future. Few of the licenses applicable to open source software have been interpreted by courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products and platform. Moreover, although we have implemented policies to regulate the use and incorporation of open source software into our products and platform, we cannot be certain that we have not incorporated open source software in our products or platform in a manner that is inconsistent with such policies. If we fail to comply with open source licenses, we may be subject to certain requirements, including requirements that we offer our products that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of applicable open source licenses. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from generating revenue from customers using products that contained the open source software and required to comply with onerous conditions or restrictions on these products. In any of these events, we and our customers could be required to seek licenses from third parties in order to continue offering our products and platform and to re-engineer our products or platform or discontinue offering our products to customers in the event re-engineering cannot be accomplished on a timely basis. Any of the foregoing could require us to devote additional research and development resources to re-engineer our products or platform, could result in customer dissatisfaction and may adversely affect our business, results of operations and financial condition. We may acquire or invest in companies, which may divert our management’s attention and result in debt or dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions. We may evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other assets in the future. We also may enter into relationships with other businesses to expand our products and platform, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies. Any acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, their products or services are not easily adapted to work with our platform, or we have difficulty retaining the customers of any acquired business due to changes in ownership, management or otherwise. Acquisitions also may disrupt our business, divert our resources or require significant management attention that would otherwise be available for development of our existing business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown risks or liabilities. Negotiating these transactions can be time consuming, difficult and expensive, and our ability to complete these transactions may often be subject to approvals that are beyond our control. F o r m 1 0 - K 35 Consequently, these transactions, even if announced, may not be completed. For one or more of those transactions, we may: • issue additional equity securities that would dilute our existing stockholders; • use cash that we may need in the future to operate our business; • incur large charges or substantial liabilities; • incur debt on terms unfavorable to us or that we are unable to repay; • encounter difficulties retaining key employees of the acquired company or integrating diverse software codes or business cultures; or • become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges. The occurrence of any of these foregoing could adversely affect our business, results of operations and financial condition. We depend largely on the continued services of our senior management and other key employees, the loss of any of whom could adversely affect our business, results of operations and financial condition. Our future performance depends on the continued services and contributions of our senior management and other key employees to execute on our business plan, to develop our products and platform, to deliver our products to customers, to attract and retain customers and to identify and pursue opportunities. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our development and strategic objectives. In particular, we depend to a considerable degree on the vision, skills, experience and effort of our co-founder and Chief Executive Officer, Jeff Lawson. None of our executive officers or other senior management personnel is bound by a written employment agreement and any of them may terminate employment with us at any time with no advance notice. On February 13, 2018, we announced that our Chief Financial Officer, Lee Kirkpatrick, will be leaving our company. Though Mr. Kirkpatrick has indicated that he will remain with us until his replacement has been hired, we could experience a delay or disruption in the achievement of our business objectives while we search for and onboard a new Chief Financial Officer and during the period the new Chief Financial Officer gets up to speed on our business and financial and accounting systems. The replacement of any other of our senior management personnel would likely involve significant time and costs, and such loss could significantly delay or prevent the achievement of our business objectives. The loss of the services of other of our senior management or other key employees for any reason could adversely affect our business, results of operations and financial condition. If we are unable to hire, retain and motivate qualified personnel, our business will suffer. Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. We believe that there is, and will continue to be, intense competition for highly skilled management, technical, sales and other personnel with experience in our industry in the San Francisco Bay Area, where our headquarters are located, and in other locations where we maintain offices. We must provide competitive compensation packages and a high quality work environment to hire, retain and motivate employees. If we are unable to retain and motivate our existing employees and attract qualified personnel to fill key positions, such as the Chief Financial Officer role, we may be unable to manage our business effectively, including the development, marketing and sale of our products, which could adversely affect our business, results of operations and financial condition. To the extent we hire personnel from competitors, we also may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information. 36 Volatility in, or lack of performance of, our stock price may also affect our ability to attract and retain key personnel. Many of our key personnel are, or will soon be, vested in a substantial number of shares of Class A common stock or stock options. Employees may be more likely to terminate their employment with us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or, conversely, if the exercise prices of the options that they hold are significantly above the trading price of our Class A common stock. If we are unable to retain our employees, our business, results of operations and financial condition could be adversely affected. Our products and platform and our business are subject to a variety of U.S. and international laws and regulations, including those regarding privacy, data protection and information security, and our customers may be subject to regulations related to the handling and transfer of certain types of sensitive and confidential information. Any failure of our products to comply with or enable our customers and channel partners to comply with applicable laws and regulations would harm our business, results of operations and financial condition. We and our customers that use our products may be subject to privacy- and data protection-related laws and regulations that impose obligations in connection with the collection, processing and use of personal data, financial data, health or other similar data. The U.S. federal and various state and foreign governments have adopted or proposed limitations on, or requirements regarding, the collection, distribution, use, security and storage of personally identifiable information of individuals. The U.S. Federal Trade Commission and numerous state attorneys general are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data, and to the security measures applied to such data. Similarly, many foreign countries and governmental bodies, including the EU member states, have laws and regulations concerning the collection and use of personally identifiable information obtained from individuals located in the EU or by businesses operating within their jurisdiction, which are often more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of personally identifiable information that identifies or may be used to identify an individual, such as names, telephone numbers, email addresses and, in some jurisdictions, IP addresses and other online identifiers. For example, in April 2016 the European Union (‘‘EU’’) adopted the General Data Protection Regulation (‘‘GDPR’’), which will take full effect on May 25, 2018. The GDPR enhances data protection obligations for businesses and requires service providers (data processors) processing personal data on behalf of customers to cooperate with European data protection authorities, implement security measures and keep records of personal data processing activities. Noncompliance with the GDPR can trigger fines equal to or greater of A20 million or 4% of global annual revenues. Given the breadth and depth of changes in data protection obligations, preparing to meet the requirements of GDPR before its effective date has required significant time and resources, including a review of our technology and systems currently in use against the requirements of GDPR. There are also additional EU laws and regulations (and member states implementations thereof) which govern the protection of consumers and of electronic communications. If our efforts to comply with GDPR or other applicable EU laws and regulations are not successful, we may be subject to penalties and fines that would adversely impact our business and results of operations, and our ability to conduct business in the EU could be significantly impaired. We have in the past relied on the EU-U.S and the Swiss-U.S. Privacy Shield frameworks approved by the European Commission in July 2016 and the Swiss Government in January 2017, respectively, which were designed to allow U.S. corporations to self-certify to the U.S. Department of Commerce and publicly commit to comply with the Privacy Shield requirements to freely import personal data from the EU and Switzerland. However, ongoing legal challenges to these frameworks has resulted in 37 F o r m 1 0 - K some uncertainty as to their validity. We anticipate engaging in efforts to legitimize data transfers from the European Economic Area, but we may experience hesitancy, reluctance, or refusal by European or multinational customers to continue to use our services due to the potential risk exposure to such customers as a result of the ECJ ruling. We and our customers are at risk of enforcement actions taken by an EU data protection authority until such point in time that we are able to ensure that all data transfers to us from the European Economic Area are legitimized. In addition, as the United Kingdom transitions out of the EU, we may encounter additional complexity with respect to data privacy and data transfers from the U.K. Additionally, although we endeavor to have our products and platform comply with applicable laws and regulations, these and other obligations may be modified, they may be interpreted and applied in an inconsistent manner from one jurisdiction to another, and they may conflict with one another, other regulatory requirements, contractual commitments or our internal practices We also may be bound by contractual obligations relating to our collection, use and disclosure of personal, financial and other data or may find it necessary or desirable to join industry or other self-regulatory bodies or other privacy- or data protection-related organizations that require compliance with their rules pertaining to privacy and data protection. We expect that there will continue to be new proposed laws, rules of self-regulatory bodies, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact such future laws, rules, regulations and standards may have on our business. Moreover, existing U.S. federal and various state and foreign privacy- and data protection-related laws and regulations are evolving and subject to potentially differing interpretations, and various legislative and regulatory bodies may expand current or enact new laws and regulations regarding privacy- and data protection- related matters. Because global laws, regulations and industry standards concerning privacy and data security have continued to develop and evolve rapidly, it is possible that we or our products or platform may not be, or may not have been, compliant with each such applicable law, regulation and industry standard and compliance with such new laws or to changes to existing laws may impact our business and practices, require us to expend significant resources to adapt to these changes, or to stop offering our products in certain countries. These developments could adversely affect our business, results of operations and financial condition. Any failure or perceived failure by us, our products or our platform to comply with new or existing U.S., EU or other foreign privacy or data security laws, regulations, policies, industry standards or legal obligations, or any security incident that results in the unauthorized access to, or acquisition, release or transfer of, personally identifiable information or other customer data may result in governmental investigations, inquiries, enforcement actions and prosecutions, private litigation, fines and penalties, adverse publicity or potential loss of business. For example, on February 18, 2016, a putative class action complaint was filed in the Alameda County Superior Court in California. The complaint alleges that our products permit the interception, recording and disclosure of communications at a customer’s request and in violation of the California Invasion of Privacy Act. This litigation, or any other such actions in the future and related penalties could divert management’s attention and resources, adversely affect our brand, business, results of operations and financial condition. Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our products, and could adversely affect our business, results of operations and financial condition. The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communications and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting 38 the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our products and platform in order to comply with these changes. In addition, government agencies or private organizations have imposed and may impose additional taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, or result in reductions in the demand for Internet-based products and services such as our products and platform. In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by ‘‘viruses’’, ‘‘worms’’, and similar malicious programs. If the use of the Internet is reduced as a result of these or other issues, then demand for our products could decline, which could adversely affect our business, results of operations and financial condition. Certain of our products are subject to telecommunications-related regulations, and future legislative or regulatory actions could adversely affect our business, results of operations and financial condition. As a provider of communications products, we are subject to existing or potential FCC regulations relating to privacy, Telecommunications Relay Service fund contributions and other requirements. FCC classification of our Internet voice communications products as telecommunications services could result in additional federal and state regulatory obligations. If we do not comply with FCC rules and regulations, we could be subject to FCC enforcement actions, fines, loss of licenses and possibly restrictions on our ability to operate or offer certain of our products. Any enforcement action by the FCC, which may be a public process, would hurt our reputation in the industry, possibly impair our ability to sell our products to customers and could adversely affect our business, results of operations and financial condition. Our products are subject to a number of FCC regulations and laws that are administered by the FCC. Among others, we must comply (in whole or in part) with: • the Communications Act of 1934, as amended, which regulates communications services and the provision of such services; • the TCPA, which limits the use of automatic dialing systems, artificial or prerecorded voice messages, SMS text messages and fax machines; • the Communications Assistance for Law Enforcement Act (‘‘CALEA’’), which requires covered entities to assist law enforcement in undertaking electronic surveillance; • requirements to safeguard the privacy of certain customer information; • payment of annual FCC regulatory fees based on our interstate and international revenues; • rules pertaining to access to our services by people with disabilities and contributions to the Telecommunications Relay Services fund; and • FCC rules regarding the use of customer proprietary network information. If we do not comply with any current or future rules or regulations that apply to our business, we could be subject to substantial fines and penalties, and we may have to restructure our offerings, exit certain markets or raise the price of our products. In addition, any uncertainty regarding whether particular regulations apply to our business, and how they apply, could increase our costs or limit our ability to grow. Any of the foregoing could adversely affect our business, results of operations and financial condition. 39 F o r m 1 0 - K As we continue to expand internationally, we have become subject to telecommunications laws and regulations in the foreign countries where we offer our products. Internationally, we currently offer our products in over 180 countries. Our international operations are subject to country-specific governmental regulation and related actions that have increased and may continue to increase our costs or impact our products and platform or prevent us from offering or providing our products in certain countries. Certain of our products may be used by customers located in countries where voice and other forms of IP communications may be illegal or require special licensing or in countries on a U.S. embargo list. Even where our products are reportedly illegal or become illegal or where users are located in an embargoed country, users in those countries may be able to continue to use our products in those countries notwithstanding the illegality or embargo. We may be subject to penalties or governmental action if consumers continue to use our products in countries where it is illegal to do so, and any such penalties or governmental action may be costly and may harm our business and damage our brand and reputation. We may be required to incur additional expenses to meet applicable international regulatory requirements or be required to discontinue those services if required by law or if we cannot or will not meet those requirements. If we are unable to effectively process local number and toll-free number portability provisioning in a timely manner or to obtain or retain direct inward dialing numbers and local or toll-free numbers, our business and results of operations may be adversely affected. We support local number and toll-free number portability, which allows our customers to transfer their existing phone numbers to us and thereby retain their existing phone numbers when subscribing to our voice products. Transferring existing numbers is a manual process that can take up to 15 business days or longer to complete. A new customer of our voice products must maintain both our voice product and the customer’s existing phone service during the number transferring process. Any delay that we experience in transferring these numbers typically results from the fact that we depend on network service providers to transfer these numbers, a process that we do not control, and these network service providers may refuse or substantially delay the transfer of these numbers to us. Local number portability is considered an important feature by many potential customers, and if we fail to reduce any related delays, then we may experience increased difficulty in acquiring new customers. In addition, our future success depends in part on our ability to procure large quantities of local and toll-free direct inward dialing numbers (‘‘DIDs’’), in the United States and foreign countries at a reasonable cost and without restrictions. Our ability to procure, distribute and retain DIDs depends on factors outside of our control, such as applicable regulations, the practices of network service providers that provide DIDs, such as offering DIDs with conditional minimum volume call level requirements, the cost of these DIDs and the level of overall competitive demand for new DIDs. Due to their limited availability, there are certain popular area code prefixes that we generally cannot obtain. Our inability to acquire or retain DIDs for our operations would make our voice and messaging products less attractive to potential customers in the affected local geographic areas. In addition, future growth in our customer base, together with growth in the customer bases of other providers of cloud communications, has increased, which increases our dependence on needing sufficiently large quantities of DIDs. It may become increasingly difficult to source larger quantities of DIDs as we scale and we may need to pay higher costs for DIDs, and DIDs may become subject to more stringent usage conditions. Any of the foregoing could adversely affect our business, results of operations and financial condition. 40 We face a risk of litigation resulting from customer misuse of our software to send unauthorized text messages in violation of the Telephone Consumer Protection Act. The actual or perceived improper sending of text messages may subject us to potential risks, including liabilities or claims relating to consumer protection laws. For example, the Telephone Consumer Protection Act of 1991 restricts telemarketing and the use of automatic SMS text messages without proper consent. This has resulted in civil claims against our company and requests for information through third-party subpoenas. The scope and interpretation of the laws that are or may be applicable to the delivery of text messages are continuously evolving and developing. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could face direct liability. We may be subject to governmental export controls and economic sanctions regulations that could impair our ability to compete in international markets due to licensing requirements and could subject us to liability if we are not in compliance with applicable laws. Certain of our products and services may be subject to export control and economic sanctions regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our products and the provision of our services must be made in compliance with these laws and regulations. Although we take precautions to prevent our products from being provided in violation of such laws, we are aware of previous exports of certain of our products to a small number of persons and organizations that are the subject of U.S. sanctions or located in countries or regions subject to U.S. sanctions. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including: the possible loss of export privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees or managers. Obtaining the necessary authorizations, including any required license, for a particular deployment may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. In addition, changes in our products or services, or changes in applicable export or economic sanctions regulations may create delays in the introduction and deployment of our products and services in international markets, or, in some cases, prevent the export of our products or provision of our services to certain countries or end users. Any change in export or economic sanctions regulations, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could also result in decreased use of our products and services, or in our decreased ability to export our products or provide our services to existing or prospective customers with international operations. Any decreased use of our products and services or limitation on our ability to export our products and provide our services could adversely affect our business, results of operations and financial condition. Further, we incorporate encryption technology into certain of our products. Various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our customers’ ability to import our products into those countries. Encryption products and the underlying technology may also be subject to export control restrictions. Governmental regulation of encryption technology and regulation of exports of encryption products, or our failure to obtain required approval for our products, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our products and provision of our services, including with respect to new releases of our products and services, may create delays in the introduction of our products and services in international markets, prevent our customers with international operations from deploying our products and using our services throughout their globally-distributed systems or, in some cases, prevent the export of our products or provision of our services to some countries altogether. 41 F o r m 1 0 - K We may have additional tax liabilities, which could harm our business, results of operations and financial condition. Significant judgments and estimates are required in determining our provision for income taxes and other tax liabilities. Our tax expense may be impacted, for example, if tax laws change or are clarified to our detriment or if tax authorities successfully challenge the tax positions that we take, such as, for example, positions relating to the arms-length pricing standards for our intercompany transactions and our state sales and use tax positions. In determining the adequacy of income taxes, we assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the Internal Revenue Service (‘‘IRS’’), and other tax authorities. Should the IRS or other tax authorities assess additional taxes as a result of examinations, we may be required to record charges to operations that could adversely affect our results of operations and financial condition. We are currently in discussions with certain states regarding prior state sales taxes that we may owe. We have reserved $20.9 million on our December 31, 2017 balance sheet for these tax payments. The actual exposure could differ materially from our current estimates, and if the actual payments we make to these and other states exceed the accrual in our balance sheet, our results of operations would be harmed. We could be subject to liability for historical and future sales, use and similar taxes, which could adversely affect our results of operations. We conduct operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income-based taxes, such as sales and use and telecommunications taxes, are assessed on our operations. We are subject to indirect taxes, and may be subject to certain other taxes, in some of these jurisdictions. Historically, we have not billed or collected these taxes and, in accordance with generally accepted accounting principles in the United States (‘‘U.S. GAAP’’), we have recorded a provision for our tax exposure in these jurisdictions when it is both probable that a liability has been incurred and the amount of the exposure can be reasonably estimated. These estimates include several key assumptions, including, but not limited to, the taxability of our products, the jurisdictions in which we believe we have nexus, and the sourcing of revenues to those jurisdictions. In the event these jurisdictions challenge our assumptions and analysis, our actual exposure could differ materially from our current estimates. We may be subject to scrutiny from state tax authorities in various jurisdictions and may have additional exposure related to our historical operations. Furthermore, certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our business, results of operations and financial condition. Effective March 2017, we began collecting telecommunications-based taxes from our customers in certain jurisdictions. Since then, we have added more jurisdictions where we collect these taxes and we expect to continue expanding the number of jurisdictions in which we will collect these taxes in the future. Some customers may question the incremental tax charges and some may seek to negotiate lower pricing from us, which could adversely affect our business, results of operations and financial condition. Our global operations and structure subject us to potentially adverse tax consequences. We generally conduct our global operations through subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. In particular, our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. Also, our tax expense could be affected depending on the applicability of withholding and other taxes (including withholding and indirect taxes on software 42 licenses and related intercompany transactions) under the tax laws of certain jurisdictions in which we have business operations. The relevant revenue and taxing authorities may disagree with positions we have taken generally, or our determinations as to the value of assets sold or acquired or income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Certain government agencies in jurisdictions where we and our affiliates do business have had an extended focus on issues related to the taxation of multinational companies. In addition, the Organization for Economic Co-operation and Development is conducting a project focused on base erosion and profit shifting in international structures, which seeks to establish certain international standards for taxing the worldwide income of multinational companies. As a result of these developments, the tax laws of certain countries in which we and our affiliates do business could change on a prospective or retroactive basis, and any such changes could increase our liabilities for taxes, interest and penalties, and therefore could harm our business, cash flows, results of operations and financial position. Changes in the U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our business, results of operations and financial condition. Changes to U.S. tax laws that may be enacted in the future could impact the tax treatment of our foreign earnings. Due to the expansion of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect our business, results of operations and financial condition. If we experience excessive credit card or fraudulent activity, we could incur substantial costs. Most of our customers authorize us to bill their credit card accounts directly for service fees that we charge. If people pay for our services with stolen credit cards, we could incur substantial third-party vendor costs for which we may not be reimbursed. Further, our customers provide us with credit card billing information online, and we do not review the physical credit cards used in these transactions, which increases our risk of exposure to fraudulent activity. We also incur charges, which we refer to as chargebacks, from the credit card companies from claims that the customer did not authorize the credit card transaction to purchase our services. If the number of unauthorized credit card transactions becomes excessive, we could be assessed substantial fines for excess chargebacks and we could lose the right to accept credit cards for payment. Our products may also be subject to fraudulent usage, including but not limited to revenue share fraud, domestic traffic pumping, subscription fraud, premium text message scams and other fraudulent schemes. Although our customers are required to set passwords or personal identification numbers to protect their accounts, third parties have in the past been, and may in the future be, able to access and use their accounts through fraudulent means. Furthermore, spammers attempt to use our products to send targeted and untargeted spam messages. We cannot be certain that our efforts to defeat spamming attacks will be successful in eliminating all spam messages from being sent using our platform. In addition, a cybersecurity breach of our customers’ systems could result in exposure of their authentication credentials, unauthorized access to their accounts or fraudulent calls on their accounts, any of which could adversely affect our business, results of operations and financial condition. F o r m 1 0 - K 43 Unfavorable conditions in our industry or the global economy or reductions in spending on information technology and communications could adversely affect our business, results of operations and financial condition. Our results of operations may vary based on the impact of changes in our industry or the global economy on our customers. Our results of operations depend in part on demand for information technology and cloud communications. In addition, our revenue is dependent on the usage of our products, which in turn is influenced by the scale of business that our customers are conducting. To the extent that weak economic conditions result in a reduced volume of business for, and communications by, our customers and prospective customers, demand for, and use of, our products may decline. Furthermore, weak economic conditions may make it more difficult to collect on outstanding accounts receivable. Additionally, historically, we have generated the substantial majority of our revenue from small and medium-sized businesses, and we expect this to continue for the foreseeable future. Small and medium-sized business may be affected by economic downturns to a greater extent than enterprises, and typically have more limited financial resources, including capital borrowing capacity, than enterprises. If our customers reduce their use of our products, or prospective customers delay adoption or elect not to adopt our products, as a result of a weak economy, this could adversely affect our business, results of operations and financial condition. We may require additional capital to support our business, and this capital might not be available on acceptable terms, if at all. We intend to continue to make investments to support our business and may require additional funds. In particular, we may seek additional funds to develop new products and enhance our platform and existing products, expand our operations, including our sales and marketing organizations and our presence outside of the United States, improve our infrastructure or acquire complementary businesses, technologies, services, products and other assets. In addition, we may use a portion of our cash to satisfy tax withholding and remittance obligations related to outstanding restricted stock units. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A and Class B common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth, scale our infrastructure, develop product enhancements and to respond to business challenges could be significantly impaired, and our business, results of operations and financial condition may be adversely affected. We face exposure to foreign currency exchange rate fluctuations, and such fluctuations could adversely affect our business, results of operations and financial condition. As our international operations expand, our exposure to the effects of fluctuations in currency exchange rates grows. While we have primarily transacted with customers and business partners in U.S. dollars, we have transacted with customers in Japan in Japanese Yen and in Europe in Euros and Swedish Kronas. We expect to significantly expand the number of transactions with customers that are denominated in foreign currencies in the future as we continue to expand our business internationally. We also incur expenses for some of our network service provider costs outside of the United States in local currencies and for employee compensation and other operating expenses at our non-U.S. locations 44 in the local currency for such locations. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in an increase to the U.S. dollar equivalent of such expenses. In addition, our international subsidiaries maintain net assets that are denominated in currencies other than the functional operating currencies of these entities. As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Accordingly, changes in the value of foreign currencies relative to the U.S. dollar can affect our results of operations due to transactional and translational remeasurements. As a result of such foreign currency exchange rate fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors and securities analysts who follow our stock, the trading price of our Class A common stock could be adversely affected. We do not currently maintain a program to hedge transactional exposures in foreign currencies. However, in the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. As of December 31, 2017, we had federal and state net operating loss carryforwards (‘‘NOLs’’), of $229.3 million and $159.6 million, respectively, due to prior period losses. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (‘‘Code’’), a corporation that undergoes an ‘‘ownership change’’ (generally defined as a greater than 50-percentage-point cumulative change (by value) in the equity ownership of certain stockholders over a rolling three-year period) is subject to limitations on its ability to utilize its pre-change NOLs to offset post-change taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change in the future, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which may be outside of our control, could result in an ownership change under Section 382 of the Code. On December 22, 2017, the U.S. government enacted new tax legislation commonly referred to as the Tax Cuts and Jobs Act (the ‘‘Tax Act’’). The Tax Act makes broad and complex changes to the U.S. tax code including changes to the uses and limitations of net operating losses. For example, while the Tax Act allows for federal net operating losses incurred in tax years beginning prior to December 31, 2017 to be carried forward indefinitely, the Tax Act also imposes an 80% limitation on the use of net operating losses that are generated in tax years beginning after December 31, 2017. Furthermore, our ability to utilize our net operating losses is conditioned upon our maintaining profitability in the future and generating U.S. federal taxable income. Since we do not know whether or when we will generate the U.S. federal taxable income necessary to utilize our remaining net operating losses, these net operating loss carryforwards could expire unused. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected. The preparation of financial statements in conformity with U.S. 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 Part II, 45 F o r m 1 0 - K Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’ The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, capitalized internal-use software development costs, legal contingencies, non-income taxes, business combination and valuation of goodwill and purchased intangible assets and stock-based compensation. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our Class A common stock. Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our results of operations. A change in accounting standards or practices may have a significant effect on our results of operations and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, in May 2014 the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09) that became effective on January 1, 2018. Based on our preliminary assessment, we do not believe there will be material changes to our revenue recognition and we are still in process of assessing the impact of adoption of the new standard on our accounting for sales commissions. Refer to Note 2 in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on the new guidance and its potential impact on us. Adoption of this standard and any difficulties in implementation of changes in accounting principles, including the ability to modify our accounting systems, could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us. We have identified a material weakness in our internal controls related to the tracking of qualifying internal use software development costs eligible for capitalization; our failure to remediate the identified deficiency may cause us not to be able to accurately or timely report our financial condition or results of operations. If one or more of our internal controls over financial reporting are not effective, it could adversely affect investor confidence in us and our reputation, business or stock price. In reviewing the accounting for our software development activities, our management has concluded that our internal controls did not effectively track and categorize software development costs between period expenses and capitalization as a fixed asset in accordance with GAAP. As described under ‘‘Item 9A—Controls and Procedures,’’ our management has concluded that the identified deficiencies constitute a material weakness in our internal control over financial reporting. Notwithstanding the foregoing, our management has concluded that the consolidated financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in this Annual Report on Form 10-K in conformity with GAAP. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Although we plan to remediate the identified deficiencies as quickly as possible, we cannot, at this time, estimate when such remediation may occur, and our initiatives may not prove successful. 46 We cannot guarantee that we will not identify additional deficiencies in our internal control over financial reporting in the future. If we are unable to remediate the deficiencies or identify additional deficiencies in the future, our ability to record, process and report financial information accurately, and to prepare financial statements within the time periods specified by the rules and forms of the SEC, could be adversely affected. The occurrence of or failure to remediate a material weakness may adversely affect our reputation and business and the market price of our common stock and any other securities we may issue. If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings. We review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. As of December 31, 2017, we carried a net $35.9 million of goodwill and intangible assets related to acquired businesses. An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or intangible assets. Any such charges may adversely affect our results of operations. Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by man-made problems such as power disruptions, computer viruses, data security breaches or terrorism. Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. A significant natural disaster, such as an earthquake, fire or flood, occurring at our headquarters, at one of our other facilities or where a business partner is located could adversely affect our business, results of operations and financial condition. Further, if a natural disaster or man-made problem were to affect our network service providers or Internet service providers, this could adversely affect the ability of our customers to use our products and platform. In addition, natural disasters and acts of terrorism could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole. We also rely on our network and third-party infrastructure and enterprise applications and internal technology systems for our engineering, sales and marketing, and operations activities. Although we maintain incident management and disaster response plans, in the event of a major disruption caused by a natural disaster or man-made problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, breaches of data security and loss of critical data, any of which could adversely affect our business, results of operations and financial condition. In addition, computer malware, viruses and computer hacking, fraudulent use attempts and phishing attacks have become more prevalent in our industry, have occurred on our platform in the past and may occur on our platform in the future. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security and availability of our products and technical infrastructure to the satisfaction of our users may harm our reputation and our ability to retain existing users and attract new users. Risks Related to Ownership of Our Class A Common Stock The trading price of our Class A common stock has been volatile and may continue to be volatile, and you could lose all or part of your investment. Prior to our initial public offering in June 2016, there was no public market for shares of our Class A common stock. On June 23, 2016, we sold shares of our Class A common stock to the public at $15.00 per share. From June 23, 2016, the date that our Class A common stock started trading on 47 F o r m 1 0 - K the New York Stock Exchange, through January 31, 2018, the trading price of our Class A common stock has ranged from $22.80 per share to $70.96 per share. The trading price of our Class A common stock may continue to fluctuate significantly in response to numerous factors, many of which are beyond our control, including: • price and volume fluctuations in the overall stock market from time to time; • volatility in the trading prices and trading volumes of technology stocks; • changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular; • sales of shares of our Class A common stock by us or our stockholders; • failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; • the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections; • announcements by us or our competitors of new products or services; • the public’s reaction to our press releases, other public announcements and filings with the SEC; • rumors and market speculation involving us or other companies in our industry; • actual or anticipated changes in our results of operations or fluctuations in our results of operations; • actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally; • litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors; • developments or disputes concerning our intellectual property or other proprietary rights; • announced or completed acquisitions of businesses, products, services or technologies by us or our competitors; • new laws or regulations or new interpretations of existing laws or regulations applicable to our business; • changes in accounting standards, policies, guidelines, interpretations or principles; • any significant change in our management; and • general economic conditions and slow or negative growth of our markets. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. Substantial future sales of shares of our Class A common stock could cause the market price of our Class A common stock to decline. The market price of our Class A common stock could decline as a result of substantial sales of our Class A common stock, particularly sales by our directors, executive officers and significant 48 stockholders, or the perception in the market that holders of a large number of shares intend to sell their shares. Additionally, the shares of Class A common stock subject to outstanding options and restricted stock unit awards under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public market upon issuance, subject to applicable insider trading policies. Certain holders of our Class A common stock have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for our stockholders or ourselves. The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of our initial public offering, including our directors, executive officers and their respective affiliates. This limits or precludes your ability to influence corporate matters, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. Our Class B common stock has 10 votes per share, and our Class A common stock has one vote per share. As of December 31, 2017, our directors, executive officers and their respective affiliates, held in the aggregate 54.5% of the voting power of our capital stock. Because of the 10-to-one voting ratio between our Class B common stock and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval until the earlier of (i) June 28, 2023, or (ii) the date the holders of two-thirds of our Class B common stock elect to convert the Class B common stock to Class A common stock. This concentrated control limits or precludes your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders. Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If securities or industry analysts cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our Class A common stock adversely, the trading price of our Class A common stock and trading volume could decline. The trading market for our Class A common stock is influenced by the research and reports that securities or industry analysts may publish about us, our business, our market or our competitors. If any of the analysts who cover us change their recommendation regarding our Class A common stock adversely, or provide more favorable relative recommendations about our competitors, the trading price of our Class A common stock would likely decline. If any analyst who covers us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the trading price of our Class A common stock or trading volume to decline. F o r m 1 0 - K 49 Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt. Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors. Among other things, our amended and restated certificate of incorporation and amended and restated bylaws include provisions: • authorizing ‘‘blank check’’ preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our Class A and Class B common stock; • limiting the liability of, and providing indemnification to, our directors and officers; • limiting the ability of our stockholders to call and bring business before special meetings; • providing for a dual class common stock structure in which holders of our Class B common stock have the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the outstanding shares of our Class A and Class B common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets; • providing that our board of directors is classified into three classes of directors with staggered three-year terms; • prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; • requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors; and • controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings. These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents certain stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of at least two-thirds of our outstanding common stock not held by such 15% or greater stockholder. Any provision of our amended and restated certificate of incorporation, amended and restated bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our Class A common stock. We do not expect to declare any dividends in the foreseeable future. We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our Class A common stock. 50 Item 1B. Unresolved Staff Comments None. Item 2. Properties Our headquarters is located in San Francisco, California, where we lease approximately 90,000 square feet of office space under a lease that expires in 2024. The lease payments range from $0.4 million per month in the first 60 months to $0.5 million per month thereafter. The lease included a tenant improvement allowance to cover construction of certain leasehold improvements for up to $8.3 million. All of this amount had been collected from the landlord as of December 31, 2017. We secured our lease obligation with a $7.4 million letter of credit, which we designated as restricted cash on our balance sheet as of December 31, 2016. As of December 31, 2017, the letter of credit and the restricted cash were reduced to $5.5 million, as stipulated in the lease agreement and upon satisfaction of required conditions. In addition to our headquarters, we lease space in Mountain View, Tallinn, Bogota, Madrid and Malmo as additional research and development offices. We also lease space for additional sales and marketing offices in New York, Dublin, London, Munich, Hong Kong and Singapore. Our Dublin office is our international headquarters. We lease all of our facilities and do not own any real property. We intend to procure additional space in the future as we continue to add employees and expand geographically. We believe our facilities are adequate and suitable for our current needs and that, should it be needed, suitable additional or alternative space will be available to accommodate our operations. Item 3. Legal Proceedings On April 30, 2015, Telesign Corporation (‘‘Telesign’’), filed a lawsuit against us in the United States District Court, Central District of California (‘‘Telesign I’’). Telesign alleges that we are infringing three U.S. patents that it holds: U.S. Patent No. 8,462,920 (‘‘‘920’’), U.S. Patent No. 8,687,038 (‘‘‘038’’) and U.S. Patent No. 7,945,034 (‘‘‘034’’). The patent infringement allegations in the lawsuit relate to our Account Security products, our two-factor authentication use case and an API tool to find information about a phone number. We petitioned the U.S. Patent and Trademark Office for inter partes review of the patents at issue. On July 8, 2016, the PTO denied our petition for inter partes review of the ‘920 and ‘038 patents and on June 26, 2017, it upheld the patentability of the ‘034 patent, adopting Telesign’s narrow construction of its patent. On March 28, 2016, Telesign filed a second lawsuit against us in the United States District Court, Central District of California (‘‘Telesign II’’), alleging infringement of U.S. Patent No. 9,300,792 (‘‘‘792’’) held by Telesign. The ‘792 patent is in the same patent family as the ‘920 and ‘038 patents asserted in Telesign I. On March 8, 2017, in response to a petition by the Company, the PTO issued an order instituting the inter partes review for the ‘792 patent. A final written decision is expected by March 2018. On March 15, 2017, Twilio filed a motion to consolidate and stay related cases pending the conclusion of the ‘792 patent inter partes review, which the court granted. With respect to each of the patents asserted in Telesign I and Telesign II, the complaints seek, among other things, to enjoin us from allegedly infringing the patents along with damages for lost profits. On December 1, 2016, we filed a patent infringement lawsuit against Telesign in the United States District Court, Northern District of California, alleging indirect infringement of United States Patent No. 8,306,021 (‘‘‘021’’), United States Patent No. 8,837,465 (‘‘‘465’’), United States Patent No. 8,755,376 (‘‘‘376’’), United States Patent No. 8,736,051 (‘‘‘051’’), United States Patent No. 8,737,962 (‘‘‘962’’), United States Patent No. 9,270,833 (‘‘‘833’’), and United States Patent No. 9,226,217 (‘‘‘217’’). Telesign filed a motion to dismiss the complaint on January 25, 2017. In two 51 F o r m 1 0 - K orders, issued on March 31, 2017 and April 17, 2017, the court granted Telesign’s motion to dismiss with respect to the ‘962, ‘833, ‘051 and ‘217 patents, but denied Telesign’s motion to dismiss as to the ‘021, ‘465 and ‘376 patents. This litigation is currently ongoing. On February 18, 2016, a putative class action complaint was filed in the Alameda County Superior Court in California, entitled Angela Flowers v. Twilio Inc. The complaint alleges that our products permit the interception, recording and disclosure of communications at a customer’s request and are in violation of the California Invasion of Privacy Act. The complaint seeks injunctive relief as well as monetary damages. On May 27, 2016, we filed a demurrer to the complaint. On August 2, 2016, the court issued an order denying the demurrer in part and granted it in part, with leave to amend by August 18, 2016 to address any claims under California’s Unfair Competition Law. The plaintiff opted not to amend the complaint. Following a period of discovery, the plaintiff filed a motion for class certification on September 20, 2017. On January 2, 2018, the court issued an order granting in part and denying in part the plaintiff’s class certification motion. The court certified two classes of individuals who, during specified time periods, allegedly sent or received certain communications involving the accounts of three of our customers that were recorded. The court has not yet set a schedule for notice to potential class members, additional discovery, summary judgment motions, or trial. We intend to vigorously defend ourselves against these lawsuits and believe we have meritorious defenses to each matter in which we are a defendant. However, litigation is inherently uncertain, and any judgment or injunctive relief entered against us or any adverse settlement could negatively affect our business, results of operations and financial condition. In addition to the litigation discussed above, from time to time, we may be subject to legal actions and claims in the ordinary course of business. 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. Future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. Item 4. Mine Safety Disclosures. Not applicable. 52 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of PART II Equity Securities Market Price of Our Class A Common Stock Our Class A common stock has been listed on the New York Stock Exchange under the symbol ‘‘TWLO’’ since June 23, 2016. Prior to that date, there was no public trading market for our Class A common stock. The following table sets forth for the periods indicated the high and low sale prices per share of our Class A common stock as reported on the New York Stock Exchange: Fiscal Year 2017 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal Year 2016 Second Quarter (from June 23, 2016) . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low High $25.98 $22.80 $26.86 $23.54 $34.95 $34.45 $34.74 $33.07 $23.66 $33.07 $28.37 $41.89 $70.96 $66.64 As of January 31, 2018, we had 128 holders of record of our Class A and Class B common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. Dividend Policy We have never declared or paid any cash dividends on our capital stock. We intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Stock Performance Graph This performance graph shall not be deemed ‘‘soliciting material’’ or to be ‘‘filed’’ with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Twilio Inc. under the Securities Act or the Exchange Act We have presented below the cumulative total return to our stockholders between June 23, 2016 (the date our Class A common stock commenced trading on the NYSE) through December 31, 2017 in comparison to the S&P 500 Index and S&P 500 Information Technology Index. All values assume a $100 initial investment and data for the S&P 500 Index and S&P 500 Information Technology Index F o r m 1 0 - K 53 assume reinvestment of dividends. The comparisons are based on historical data and are not indicative of, nor intended to forecast, the future performance of our Class A common stock. $250 $200 $150 $100 $50 6/23/2016 6/30/2016 9/30/2016 12/30/2016 3/31/2017 6/30/2017 9/30/2017 12/30/2017 Twilio Inc S&P 500 Index S&P 500 Information Technology Index 23FEB201806241756 Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities (a) Sales of Unregistered Securities In November 2017, Twilio.org donated 45,383 shares of unregistered Class A common stock to an independent DAF to further our philanthropic goals. The shares are ‘‘restricted securities’’ for purposes of Rule 144 under the Securities Act and the fair market value of these shares on the date of the donation was $1.2 million. This amount is recorded as charitable contribution in the consolidated statement of operations included elsewhere in this Annual Report on Form 10-K. (b) Use of Proceeds In June 2016, we closed our initial public offering (‘‘IPO’’), in which we sold 11,500,000 shares of Class A common stock at a price to the public of $15.00 per share, including shares sold in connection with the exercise of the underwriters’ option to purchase additional shares. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-211634), which was declared effective by the SEC on June 22, 2016. We raised $155.5 million in net proceeds after deducting underwriting discounts and commissions of $12.1 million and offering expenses of $4.9 million. No payments were made by us to directors, officers or persons owning 10 percent or more of our capital stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries. There has been no material change 54 in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on June 23, 2016 pursuant to Rule 424(b). We invested the funds received in accordance with our board-approved investment policy, which provides for investments in obligations of the U.S. government, money market instruments, registered money market funds and corporate bonds. The managing underwriters of our IPO were Goldman, Sachs & Co. and J.P. Morgan Securities LLC. In October 2016, we closed our follow-on public offering, in which we sold 1,691,222 shares of Class A common stock at a price to the public of $40.00 per share, including shares sold in connection with the exercise of the underwriters’ option to purchase additional shares. The offer and sale of all of the shares in the follow-on offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-214034), which was declared effective by the SEC on October 20, 2016. We raised $64.4 million in net proceeds after deducting underwriting discounts and commissions and offering expenses paid and payable by us. No payments were made by us to directors, officers or persons owning 10 percent or more of our capital stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries. There has been no material change in the planned use of proceeds from our follow-on offering as described in our final prospectus filed with the SEC on October 21, 2016 pursuant to Rule 424(b). We invested the funds received in accordance with our board-approved investment policy, which provides for investments in obligations of the U.S. government, money market instruments, registered money market funds and corporate bonds. The managing underwriters of our follow-on offering were Goldman, Sachs & Co. and J.P. Morgan Securities LLC. (c) Issuer Purchases of Equity Securities None. Item 6. Selected Financial and Other Data We have derived the selected consolidated statements of operations data for the years ended December 31, 2017, 2016 and 2015 and the balance sheet data as of December 31, 2017 and 2016 from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statements of operations data for the years ended December 31, 2014 and 2013 and the consolidated balance sheet data as of December 31, 2015, 2014 and 2013 are derived from audited consolidated financial statements not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected in the future. The following selected consolidated financial and other data should be read in conjunction with Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’, and our consolidated financial statements and the related notes appearing in Item 8, ‘‘Financial Statements and F o r m 1 0 - K 55 Supplementary Data’’, of this Annual Report on Form 10-K to fully understand factors that may affect the comparability of the information presented below. Year Ended December 31, 2017 2016 2015 2014 2013 (In thousands, except share, per share and customer data) Consolidated Statement of Operations Data: Revenue . . . . . . . . . . . . . . . . . . . . . Cost of revenue(1)(2) . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . $ 399,020 182,895 216,125 $ 277,335 120,520 156,815 $ 166,919 74,454 92,465 $ $ 88,846 41,423 47,423 21,824 33,322 18,960 — 74,106 (26,683) (62) (26,745) (13) (26,758) 49,920 25,868 24,052 13,959 21,931 15,012 — 50,902 (26,850) (4) (26,854) — (26,854) Operating expenses: Research and development(1)(2) . . . Sales and marketing(1)(2) . . . . . . . . General and administrative(1)(2) . . . Charitable contribution . . . . . . . . . Total operating expenses . . . . . . Loss from operations . . . . . . . . . Other income (expenses), net . . . . . . Loss before provision for income . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . taxes Net loss . . . . . . . . . . . . . . . . . . Deemed dividend to investors in relation to tender offer . . . . . . . . . Net loss attributable to common 120,739 100,669 59,619 1,172 282,199 (66,074) 3,071 (63,003) (705) (63,708) 77,926 65,267 51,077 3,860 198,130 (41,315) 317 (40,998) (326) (41,324) 42,559 49,308 35,991 — 127,858 (35,393) 11 (35,382) (122) (35,504) — — (3,392) — — stockholders . . . . . . . . . . . . . . . . $ (63,708) $ (41,324) $ (38,896) $ (26,758) $ (26,854) Net loss per share attributable to common stockholders, basic and diluted . . . . . . . . . . . . . . . . . . . . Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted . . . Key Business Metrics: Number of Active Customer Accounts(3) (as of end date of period) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Base Revenue Growth Rate . . . . . . . . Dollar-Based Net Expansion Rate(5) Base Revenue(4) $ (0.70) $ (0.78) $ (2.19) $ (1.58) $ (1.59) 91,224,607 53,116,675 17,746,526 16,900,124 16,916,035 48,979 365,490 36,606 245,548 $ 25,347 136,851 $ $ $ 16,631 75,697 $ 11,048 41,751 49% 128% 79% 161% 81% 155% 81% 153% 111% 170% (1) Includes stock-based compensation expense as follows: Year Ended December 31, 2017 2016 2015 2014 2013 (In thousands) Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . 650 $ 22,808 9,822 16,339 291 $ 12,946 4,972 6,016 $ 65 4,046 2,389 2,377 $ 39 1,577 1,335 1,027 $ 27 810 753 567 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $49,619 $24,225 $8,877 $3,978 $2,157 56 (2) Includes amortization of acquired intangibles as follows: Year Ended December 31, 2017 2016 2015 2014 2013 Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . $4,644 139 753 84 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,620 (In thousands) $619 151 — 110 $880 $239 $— $— 130 — — — — — 95 — — $464 $— $— (3) (4) (5) See Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Number of Active Customer Accounts.’’ See Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Base Revenue.’’ See Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Dollar-Based Net Expansion Rate.’’ As of December 31, 2017 2016 2015 2014 2013 (In thousands) Consolidated Balance Sheet Data: Cash and cash equivalents . . . . . . . . . . . . . . . . . Marketable securities . . . . . . . . . . . . . . . . . . . . . Working capital . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . $115,286 175,587 274,738 50,541 449,782 $359,846 $305,665 — 279,676 37,552 412,694 $329,447 $108,835 — 96,032 14,058 157,516 $116,625 $32,627 — 22,132 6,751 55,993 $31,194 $54,715 — 48,054 3,688 67,056 $52,900 Non-GAAP Financial Measures We use the following non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations, and assists in comparisons with other companies, many of which use similar non-GAAP financial information to supplement their GAAP results. Non-GAAP financial information is presented for supplemental informational purposes only, and should not be considered a substitute for financial information presented in accordance with generally accepted accounting principles, and may be different from similarly-titled non-GAAP measures used by other companies. Whenever we use a non-GAAP financial measure, a reconciliation is provided to the most closely applicable financial measure stated in accordance with generally accepted accounting principles. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures. F o r m 1 0 - K 57 Non-GAAP Gross Profit and Non-GAAP Gross Margin. For the periods presented, we define non-GAAP gross profit and non-GAAP gross margin as GAAP gross profit and GAAP gross margin, respectively, adjusted to exclude stock-based compensation and amortization of acquired intangibles. Reconciliation: Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-GAAP adjustments: Year Ended December 31, 2017 2016 2015 2014 2013 (In thousands) $216,125 $156,815 $92,465 $47,423 $24,052 Stock-based compensation . . . . . . . . . . . . . . . . Amortization of acquired intangibles . . . . . . . . . 650 4,644 291 619 65 239 39 — 27 — Non-GAAP gross profit . . . . . . . . . . . . . . . . $221,419 $157,725 $92,769 $47,462 $24,079 Non-GAAP gross margin . . . . . . . . . . . . . . . 55% 57% 56% 53% 48% Non-GAAP Operating Expenses. For the periods presented, we define non-GAAP operating expenses (including categories of operating expenses) as GAAP operating expenses (and categories of operating expenses) adjusted to exclude, as applicable, stock-based compensation, amortization of acquired intangibles, acquisition-related expenses, release of tax liability upon obligation settlement, charitable contribution, gain on lease termination and payroll taxes related to stock-based compensation. Reconciliation: Operating expenses . . . . . . . . . . . . . . . . . . . . . . Non-GAAP adjustments: Stock-based compensation . . . . . . . . . . . . . . . Amortization of acquired intangibles . . . . . . . . Stock repurchase . . . . . . . . . . . . . . . . . . . . . . Acquisition-related expenses . . . . . . . . . . . . . . Release of tax liability upon obligation settlement . . . . . . . . . . . . . . . . . . . . . . . . . Charitable contribution . . . . . . . . . . . . . . . . . . Gain on lease termination . . . . . . . . . . . . . . . Payroll taxes related to stock-based Year Ended December 31, 2017 2016 2015 2014 2013 (In thousands) $282,199 $198,130 $127,858 $74,106 $50,902 (48,969) (976) — (310) 13,365 (1,172) 295 (23,934) (261) — (499) 805 (3,860) — (8,812) (225) (1,965) (1,165) (3,939) — — — (2,130) — — — — — — — — — — — — — — — compensation . . . . . . . . . . . . . . . . . . . . . . . (2,950) (434) Non-GAAP operating expenses . . . . . . . . . . $241,482 $169,947 $115,691 $70,167 $48,772 Non-GAAP Loss from Operations and Non-GAAP Operating Margin. For the periods presented, we define non-GAAP loss from operations and non-GAAP operating margin as GAAP loss from operations and GAAP operating margin, respectively, adjusted to exclude stock-based compensation, amortization of acquired intangibles, acquisition-related expenses, release of tax liability upon obligation 58 settlement, charitable contribution, gain on lease termination and payroll taxes related to stock-based compensation. Reconciliation: Loss from operations . . . . . . . . . . . . . . . Non-GAAP adjustments: Stock-based compensation . . . . . . . . . . Amortization of acquired intangibles . . . Stock repurchase . . . . . . . . . . . . . . . . . Acquisition-related expenses . . . . . . . . . Release of tax liability upon obligation settlement . . . . . . . . . . . . . . . . . . . . Charitable contribution . . . . . . . . . . . . Gain on lease termination . . . . . . . . . . Payroll taxes related to stock-based Year Ended December 31, 2017 2016 2015 2014 2013 (In thousands) $(66,074) $(41,315) $(35,393) $(26,683) $(26,850) 49,619 5,620 — 310 (13,365) 1,172 (295) 24,225 880 — 499 (805) 3,860 — 8,877 464 1,965 1,165 — — — — 3,978 — — — — — — — 2,157 — — — — — — — compensation . . . . . . . . . . . . . . . . . . 2,950 434 Non-GAAP loss from operations . . . . $(20,063) $(12,222) $(22,922) $(22,705) $(24,693) Non-GAAP operating margin . . . . . . (5)% (4)% (14)% (26)% (50)% F o r m 1 0 - K 59 Item 7. 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 consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that are based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward- looking statements as a result of various factors, including those set forth under Part I, Item 1A, ‘‘Risk Factors’’ in this Annual Report on Form 10-K. Our fiscal year ends on December 31. Overview We are the leader in the Cloud Communications Platform category. We enable developers to build, scale and operate real-time communications within their software applications via our simple-to-use Application Programming Interfaces (‘‘APIs’’). The power, flexibility, and reliability offered by our software building blocks empowers companies of virtually every shape and size to build world-class engagement into their customer experience. Our platform consists of three layers: our Engagement Cloud, Programmable Communications Cloud and Super Network. Our Engagement Cloud software is a set of APIs that handles the higher level communication logic needed for nearly every type of customer engagement. These APIs are focused on the business challenges that a developer is looking to address, allowing our customers to more quickly and easily build better ways to engage with their customers throughout their journey. Our Programmable Communications Cloud software is a set of APIs that enables developers to embed voice, messaging and video capabilities into their applications. The Programmable Communications Cloud is designed to support almost all the fundamental ways humans communicate, unlocking innovators to address just about any communication market. The Super Network is our software layer that allows our customers’ software to communicate with connected devices globally. It interconnects with communications networks around the world and continually analyzes data to optimize the quality and cost of communications that flow through our platform. The Super Network also contains a set of APIs that gives our customers access to more foundational components of our platform, like phone numbers. As of December 31, 2017, our customers’ applications that are embedded with our products could reach users via voice, messaging and video in nearly every country in the world, and our platform offered customers local telephone numbers in over 100 countries and text-to-speech functionality in 26 languages. We support our global business through 27 cloud data centers in nine regions around the world and have developed contractual relationships with network service providers globally. Our business model is primarily focused on reaching and serving the needs of software developers, who we believe are becoming increasingly influential in technology decisions in a wide variety of companies. We call this approach our Business Model for Innovators, which empowers developers by reducing friction and upfront costs, encouraging experimentation, and enabling developers to grow as customers as their ideas succeed. We established and maintain our leadership position by engaging directly with, and cultivating, our developer community, which has led to the rapid adoption of our platform. We reach developers through community events and conferences, including our SIGNAL developer conferences, to demonstrate how every developer can create differentiated applications incorporating communications using our products. Once developers are introduced to our platform, we provide them with a low friction trial experience. By accessing our easy-to-adopt APIs, extensive self-service documentation and customer support team, developers build our products into their applications and then test such applications through free trials. Once they have decided to use our products beyond the initial free trial period, 60 customers provide their credit card information and only pay for the actual usage of our products. Historically, we have acquired the substantial majority of our customers through this self-service model. As customers expand their usage of our platform, our relationships with them often evolve to include business leaders within their organizations. Once our customers reach a certain spending level with us, we support them with account executives or customer success advocates within our sales organization to ensure their satisfaction and expand their usage of our products. When potential customers do not have the available developer resources to build their own applications, we refer them to our network of Solution Partners, who embed our products in their solutions, such as software for contact centers, sales force automation and marketing automation that they sell to other businesses. We supplement our self-service model with a sales effort aimed at engaging larger potential customers, strategic leads and existing customers through a direct sales approach. We augment this sales effort with the Twilio Enterprise Plan, which provides capabilities for advanced security, access management and granular administration, and is targeted at the needs of enterprise scale customers. Our sales organization works with technical and business leaders who are seeking to leverage software to drive competitive differentiation. As we educate these leaders on the benefits of developing applications that incorporate our products to differentiate their business, they often consult with their developers regarding implementation. We believe that developers are often advocates for our products as a result of our developer-focused approach. Our sales organization includes sales development, inside sales, field sales, sales engineering and customer success personnel. We generate the substantial majority of our revenue from customers based on their usage of our software products that they have incorporated into their applications. In addition, customers typically purchase one or more telephone numbers from us, for which we charge a monthly flat fee per number. Some customers also choose to purchase various levels of premium customer support for a monthly fee. Customers that register in our self-service model typically pay upfront via credit card and draw down their balance as they purchase or use our products. Most of our customers draw down their balance in the same month they pay up front and, as a result, our deferred revenue at any particular time is not a meaningful indicator of future revenue. As our customers’ usage grows, some of our customers enter into contracts and are invoiced monthly in arrears. Many of these customer contracts have terms of 12 months and typically include some level of minimum revenue commitment. Most customers with minimum revenue commitment contracts generate a significant amount of revenue in excess of their minimum revenue commitment in any period. Historically, the aggregate minimum commitment revenue from customers with whom we have contracts has constituted a minority of our revenue in any period, and we expect this to continue in the future. Our developer-focused products are delivered to customers and users through our Super Network, which uses software to optimize communications on our platform. We interconnect with communications networks globally to deliver our products, and therefore we have arrangements with network service providers in many regions throughout the world. Historically, a substantial majority of our cost of revenue has been network service provider fees. We continue to optimize our network service provider coverage and connectivity through continuous improvements in routing and sourcing in order to lower the usage expenses we incur for network service provider fees. As we benefit from our platform optimization efforts, we sometimes pass these savings on to customers in the form of lower usage prices on our products in an effort to drive increased usage and expand the reach and scale of our platform. In the near term, we intend to operate our business to expand the reach and scale of our platform and to grow our revenue, rather than to maximize our gross margins. We have achieved significant growth in recent periods. For the years ended December 31, 2017, 2016 and 2015, our revenue was $399.0 million, $277.3 million and $166.9 million, respectively. In 2017, 2016 and 2015, our 10 largest Active Customer Accounts generated an aggregate of 19%, 30% and 61 F o r m 1 0 - K 32%, respectively. For the years ended December 31, 2017, 2016 and 2015, among our 10 largest Active Customer Accounts we had three, three and two Variable Customer Accounts, respectively, representing 8%, 11% and 17%, respectively. For the years ended December 31, 2017, 2016 and 2015, our Base Revenue was $365.5 million, $245.5 million and $136.9 million, respectively. We incurred a net loss of $63.7 million, $41.3 million and $35.5 million, for the years ended December 31, 2017, 2016 and 2015, respectively. See the section titled ‘‘—Key Business Metrics—Base Revenue’’ for a discussion of Base Revenue. Key Business Metrics Year Ended December 31, 2017 2016 2015 Number of Active Customer Accounts (as of end date of period) . . . . . . . . . . . . . . . . . . . . . . . . . . Base Revenue (in thousands) . . . . . . . . . . . . . . . . . Base Revenue Growth Rate . . . . . . . . . . . . . . . . . Dollar-Based Net Expansion Rate . . . . . . . . . . . . . 48,979 $365,490 36,606 $245,548 25,347 $136,851 49% 128% 79% 161% 81% 155% Number of Active Customer Accounts. We believe that the number of our Active Customer Accounts is an important indicator of the growth of our business, the market acceptance of our platform and future revenue trends. We define an Active Customer Account at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least $5 of revenue in the last month of the period. We believe that the use of our platform by our customers at or above the $5 per month threshold is a stronger indicator of potential future engagement than trial usage of our platform or usage at levels below $5 per month. A single organization may constitute multiple unique Active Customer Accounts if it has multiple account identifiers, each of which is treated as a separate Active Customer Account. In the years ended December 31, 2017, 2016 and 2015, revenue from Active Customer Accounts represented over 99% of total revenue in each period. Base Revenue. We monitor Base Revenue as one of the more reliable indicators of future revenue trends. Base Revenue consists of all revenue other than revenue from large Active Customer Accounts that have never entered into 12-month minimum revenue commitment contracts with us, which we refer to as Variable Customer Accounts. While almost all of our customer accounts exhibit some level of variability in the usage of our products, based on our experience, we believe that Variable Customer Accounts are more likely to have significant fluctuations in usage of our products from period to period, and therefore that revenue from Variable Customer Accounts may also fluctuate significantly from period to period. This behavior is best evidenced by the decision of such customers not to enter into contracts with us that contain minimum revenue commitments, even though they may spend significant amounts on the use of our products and they may be foregoing more favorable terms often available to customers that enter into committed contracts with us. This variability adversely affects our ability to rely upon revenue from Variable Customer Accounts when analyzing expected trends in future revenue. For historical periods through March 31, 2016, we defined a Variable Customer Account as an Active Customer Account that (i) had never signed a minimum revenue commitment contract with us for a term of at least 12 months and (ii) had met or exceeded 1% of our revenue in any quarter in the periods presented through March 31, 2016. To allow for consistent period-to-period comparisons, in the event a customer account qualified as a Variable Customer Account as of March 31, 2016, or a previously Variable Customer Account ceased to be an Active Customer Account as of such date, we included such customer account as a Variable Customer Account in all periods presented. For reporting 62 periods starting with the three months ended June 30, 2016, we define a Variable Customer Account as a customer account that (a) has been categorized as a Variable Customer Account in any prior quarter, as well as (b) any new customer account that (i) is with a customer that has never signed a minimum revenue commitment contract with us for a term of at least 12 months and (ii) meets or exceeds 1% of our revenue in a quarter. Once a customer account is deemed to be a Variable Customer Account in any period, it remains a Variable Customer Account in subsequent periods unless such customer enters into a minimum revenue commitment contract with us for a term of at least 12 months. In the years ended December 31, 2017, 2016 and 2015, we had six, eight and nine Variable Customer Accounts, which represented 8%, 11% and 18% , respectively, of our total revenue. Dollar-Based Net Expansion Rate. Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with existing Active Customer Accounts and to increase their use of the platform. An important way in which we track our performance in this area is by measuring the Dollar-Based Net Expansion Rate for our Active Customer Accounts, other than our Variable Customer Accounts. Our Dollar-Based Net Expansion Rate increases when such Active Customer Accounts increase usage of a product, extend usage of a product to new applications or adopt a new product. Our Dollar-Based Net Expansion Rate decreases when such Active Customer Accounts cease or reduce usage of a product or when we lower usage prices on a product. As our customers grow their businesses and extend the use of our platform, they sometimes create multiple customer accounts with us for operational or other reasons. As such, for reporting periods starting with the three months ended December 31, 2016, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of our revenue in a quarterly reporting period) that has created a new Active Customer Account, this new Active Customer Account is tied to, and revenue from this new Active Customer Account is included with, the original Active Customer Account for the purposes of calculating this metric. We believe measuring our Dollar-Based Net Expansion Rate on revenue generated from our Active Customer Accounts, other than our Variable Customer Accounts, provides a more meaningful indication of the performance of our efforts to increase revenue from existing customers. Our Dollar-Based Net Expansion Rate compares the revenue from Active Customer Accounts, other than Variable Customer Accounts, in a quarter to the same quarter in the prior year. To calculate the Dollar-Based Net Expansion Rate, we first identify the cohort of Active Customer Accounts, other than Variable Customer Accounts, that were Active Customer Accounts in the same quarter of the prior year. The Dollar-Based Net Expansion Rate is the quotient obtained by dividing the revenue generated from that cohort in a quarter, by the revenue generated from that same cohort in the corresponding quarter in the prior year. When we calculate Dollar-Based Net Expansion Rate for periods longer than one quarter, we use the average of the applicable quarterly Dollar-Based Net Expansion Rates for each of the quarters in such period. Net Loss Carryforwards At December 31, 2017, we had federal and state net operating loss carryforwards of approximately $229.3 million and $159.6 million, respectively, and federal and state tax credits of approximately $12.6 million and $11.0 million, respectively. If not utilized, the federal and state loss carryforwards will expire at various dates beginning in 2029 and 2026, respectively, and the federal tax credits will expire at various dates beginning in 2029. The state tax credits can be carried forward indefinitely. At present, we believe that it is more likely than not that the federal and state net operating loss and credit carryforwards will not be realized. Accordingly, a full valuation allowance has been established for these tax attributes, as well as the rest of the federal and state deferred tax assets. F o r m 1 0 - K 63 Acquisitions In February 2017, we acquired Beepsend, AB, a messaging provider based in Sweden, specializing in messaging and SMS solutions. The purchase price was $23.0 million in cash, of which $5.0 million was placed into escrow. The escrow continues for 18 months after the transaction closing date and may be extended under certain circumstances. Additionally, $2.0 million of the purchase price was deposited into a separate escrow that will be released to certain employees in February 2018 and 2019, provided certain conditions are met. In November 2016, we acquired certain assets of Tikal Technologies S.L., a Spanish corporation, behind its Kurento Open Source Project, consisting of proprietary WebRTC media processing technologies, certain licenses, patents and trademarks and employee relationships behind the WebRTC technology. The purchase price consisted of $8.5 million in cash, of which $1.5 million was placed into escrow. The escrow continues for 24 months and 10 days from the acquisition date and may be extended under certain circumstances. Stock Repurchase On August 21, 2015, we repurchased an aggregate of 365,916 shares of Series A preferred stock and Series B preferred stock from certain preferred stockholders, and repurchased an aggregate of 1,869,156 shares of common stock from certain current and former employees, for $22.8 million in cash, which transaction we refer to as the 2015 Repurchase. The 2015 Repurchase was conducted at a price in excess of the fair value of our common stock at the date of repurchase. No special rights or privileges were conveyed to the employees and former employees. However, not all employees were invited to participate in the 2015 Repurchase. We recorded a compensation expense in the amount of $2.0 million, which represented the excess of the common stock repurchase price above the fair value of the common stock on the date of repurchase. The excess of the preferred stock repurchase price above the carrying value of the preferred stock was recorded as a deemed dividend in the year ended December 31, 2015. We retired the shares repurchased in the 2015 Repurchase as of August 21, 2015. Key Components of Statements of Operations Revenue. We derive our revenue primarily from usage-based fees earned from customers using the software products within our Engagement Cloud and Programmable Communications Cloud. These usage-based software products include offerings, such as Programmable Voice, Programmable Messaging and Programmable Video. Some examples of the usage-based fees for which we charge include minutes of call duration activity for our Programmable Voice products, number of text messages sent or received using our Programmable Messaging products and number of authentications for our Account Security products. In 2017, 2016 and 2015, we generated 83%, 83% and 79% of our revenue, respectively, from usage-based fees. We also earn monthly flat fees from certain fee-based products, such as telephone numbers and customer support. Customers typically pay upfront via credit card in monthly prepaid amounts and draw down their balances as they purchase or use our products. As customers grow their usage of our products they automatically receive tiered usage discounts. Our larger customers often enter into contracts, for at least 12 months, which contain minimum revenue commitments, which may contain more favorable pricing. Customers on such contracts typically are invoiced monthly in arrears for products used. Amounts that have been charged via credit card or invoiced are recorded in accounts receivable and in revenue or deferred revenue, depending on whether the revenue recognition criteria have been met. Given that our credit card prepayment amounts tend to be approximately equal to our credit card consumption amounts in each period, and that we do not have many invoiced customers on pre-payment contract terms, our deferred revenue at any particular time is not a meaningful indicator of future revenue. 64 We define U.S. revenue as revenue from customers with IP addresses at the time of registration in the United States, and we define international revenue as revenue from customers with IP addresses at the time of registration outside of the United States. Cost of Revenue and Gross Margin. Cost of revenue consists primarily of fees paid to network service providers. Cost of revenue also includes cloud infrastructure fees, personnel costs, such as salaries and stock-based compensation for our customer support employees, and non-personnel costs, such as amortization of capitalized internal use software development costs. Our arrangements with network service providers require us to pay fees based on the volume of phone calls initiated or text messages sent, as well as the number of telephone numbers acquired by us to service our customers. Our arrangements with our cloud infrastructure provider require us to pay fees based on our server capacity consumption. Our gross margin has been and will continue to be affected by a number of factors, including the timing and extent of our investments in our operations, our ability to manage our network service provider and cloud infrastructure-related fees, the mix of U.S. revenue compared to international revenue, the timing of amortization of capitalized software development costs and the extent to which we periodically choose to pass on our cost savings from platform optimization efforts to our customers in the form of lower usage prices. Operating Expenses. The most significant components of operating expenses are personnel costs, which consist of salaries, benefits, bonuses, stock-based compensation and compensation expenses related to stock repurchases from employees. We also incur other non-personnel costs related to our general overhead expenses. We expect that our operating costs will increase in absolute dollars. Research and Development. Research and development expenses consist primarily of personnel costs, outsourced engineering services, cloud infrastructure fees for staging and development, amortization of capitalized internal use software development costs and an allocation of our general overhead expenses. We capitalize the portion of our software development costs that meets the criteria for capitalization. We continue to focus our research and development efforts on adding new features and products, including new use cases, improving our platform and increasing the functionality of our existing products. Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs, including commissions for our sales employees. Sales and marketing expenses also include expenditures related to advertising, marketing, our brand awareness activities and developer evangelism, costs related to our SIGNAL developer conferences, credit card processing fees, professional services fees and an allocation of our general overhead expenses. We focus our sales and marketing efforts on generating awareness of our company, platform and products through our developer evangelist team and self-service model, creating sales leads and establishing and promoting our brand, both domestically and internationally. We plan to continue investing in sales and marketing by increasing our sales and marketing headcount, supplementing our self-service model with an enterprise sales approach, expanding our sales channels, driving our go-to-market strategies, building our brand awareness and sponsoring additional marketing events. General and Administrative. General and administrative expenses consist primarily of personnel costs for our accounting, finance, legal, human resources and administrative support personnel and executives. General and administrative expenses also include costs related to business acquisitions, legal and other professional services fees, sales and other taxes, depreciation and amortization and an allocation of our general overhead expenses. We expect that we will incur costs associated with 65 F o r m 1 0 - K supporting the growth of our business and to meet the increased compliance requirements associated with both our international expansion and our transition to, and operation as, a public company. Our general and administrative expenses include a significant amount of sales and other taxes to which we are subject based on the manner we sell and deliver our products. Prior to March 2017, we did not collect such taxes from our customers and recorded such taxes as general and administrative expenses. Effective March 2017, we began collecting these taxes from customers in certain jurisdictions and added more jurisdictions throughout 2017 where we are now collecting these taxes. We continue expanding the number of jurisdictions where we will be collecting these taxes in the future. We expect that these expenses will decline in future years as we continue collecting these taxes from our customers in more jurisdictions, which would reduce our rate of ongoing accrual. Provision for Income Taxes. Our income tax provision or benefit for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items occurring in the quarter. The primary difference between our effective tax rate and the federal statutory rate relates to the net operating losses in jurisdictions with a valuation allowance or a zero tax rate. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the ‘‘Tax Act’’). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (‘‘AMT’’) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax (‘‘BEAT’’), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. We remeasured certain deferred tax assets and liabilities based on rates at which they are expected to reverse in the future, which is generally 21%. The rate reduction would generally take effect on January 1, 2018. Consequently, any changes in the U.S. corporate income tax rate will impact the carrying value of our deferred tax assets. Under the new corporate income tax rate of 21%, U.S. federal and state deferred tax assets will decrease by approximately $28 million and the valuation allowance will decrease by approximately $28 million. Due to the valuation allowance on the deferred tax assets, the provisional amount recorded related to the remeasurement was zero. 66 Results of Operations The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of our historical results are not necessarily indicative of the results that may be expected in the future. Consolidated Statements of Operations Data: Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenue(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 399,020 182,895 216,125 277,335 120,520 156,815 $ 166,919 74,454 92,465 Year Ended December 31, 2017 2016 2015 (In thousands, except share and per share data) Operating expenses: Research and development(1)(2) . . . . . . . . . . . . . . . . . . . . . Sales and marketing(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative(1)(2) . . . . . . . . . . . . . . . . . . . . . Charitable contribution . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expenses), net . . . . . . . . . . . . . . . . . . . . . . . Loss before provision for income taxes . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deemed dividend to investors in relation to tender offer . . . . Net loss attributable to common stockholders . . . . . . . . Net loss per share attributable to common stockholders, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Includes stock-based compensation expense as follows: 120,739 100,669 59,619 1,172 282,199 (66,074) 3,071 (63,003) (705) (63,708) — 77,926 65,267 51,077 3,860 42,559 49,308 35,991 — 198,130 127,858 (41,315) 317 (40,998) (326) (41,324) — (35,393) 11 (35,382) (122) (35,504) (3,392) $ $ (63,708) $ (41,324) $ (38,896) (0.70) $ (0.78) $ (2.19) 91,224,607 53,116,675 17,746,526 Year Ended December 31, 2017 2016 2015 (In thousands) F o r m 1 0 - K Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . $ 650 22,808 9,822 16,339 $ 291 12,946 4,972 6,016 $ 65 4,046 2,389 2,377 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $49,619 $24,225 $8,877 67 (2) Includes amortization of acquired intangibles as follows: Year Ended December 31, 2017 2016 2015 Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . (In thousands) $619 151 — 110 $4,644 139 753 84 $239 130 — 95 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,620 $880 $464 Year Ended December 31, 2017 2016 2015 Consolidated Statements of Operations, as a percentage of revenue:** Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 43 46 45 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charitable contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expenses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deemed dividend to investors in relation to tender offer . . . . . . . . . . . . . . . . . . 54 30 25 15 * 71 (17) 1 (16) * (16) — 57 28 24 18 1 71 (15) * (15) * (15) — 55 25 30 22 — 77 (21) * (21) * (21) (2) Net loss attributable to common stockholders . . . . . . . . . . . . . . . . . . . . . . . (16)% (15)% (23)% * Less than 0.5% of revenue. ** Columns may not add up to 100% due to rounding. 68 Comparison of the Fiscal Years Ended December 31, 2017, 2016 and 2015 Revenue Year Ended December 31, 2017 2016 2015 2016 to 2017 Change 2015 to 2016 Change (Dollars in thousands) Base revenue . . . . . . . . . . . . . . . . . . . . . . . $365,490 $245,548 $136,851 $119,942 49% $108,697 79% 6% 33,530 Variable revenue . . . . . . . . . . . . . . . . . . . . . 31,787 30,068 1,719 1,743 5% Total revenue . . . . . . . . . . . . . . . . . . . . . $399,020 $277,335 $166,919 $121,685 44% $110,416 66% 2017 Compared to 2016 In 2017, Base Revenue increased by $120.0 million, or 49%, compared to 2016, and represented 92% and 89% of total revenue in 2017 and 2016, respectively. This increase was primarily attributable to an increase in the usage of all our products, particularly our Programmable Messaging products and Programmable Voice products, and the adoption of additional products by our existing customers. This increase was partially offset by pricing decreases that we have implemented over time in the form of lower usage prices, in an effort to increase the reach and scale of our platform. The changes in usage and price in 2017 were reflected in our Dollar-Based Net Expansion Rate of 128%. The increase in usage was also attributable to a 34% increase in the number of Active Customer Accounts, from 36,606 as of December 31, 2016 to 48,979 as of December 31, 2017. Revenue from Uber, our largest Base Customer, decreased in 2017, due to a combination of product usage decreases and certain price adjustments that were made by us as a result of Uber’s high volume growth. Accordingly, we expect the year-over-year decline in our revenue from Uber to continue to negatively impact our revenue growth rates and our Dollar-Based Net Expansion Rate for upcoming periods. In 2017, Variable Revenue increased by $1.7 million, or 5%, compared to 2016, and represented 8% and 11% of total revenue in 2017 and 2016, respectively. This increase was primarily attributable to the increase in the usage of products by our existing Variable Customer Accounts, partially offset by the decrease in number of Variable Customer Accounts from eight to six. U.S. revenue and international revenue represented $308.6 million, or 77%, and $90.4 million, or 23%, respectively, of total revenue in 2017, compared to $233.9 million, or 84%, and $43.4 million, or 16%, respectively, of total revenue in 2016. The increase in international revenue was attributable to the growth in usage of our products, particularly our Programmable Messaging products and Programmable Voice products, by our existing international Active Customer Accounts; a 39% increase in the number of international Active Customer Accounts, excluding the impact from our Beepsend acquisition, driven in part by our focus on expanding our sales to customers outside of the United States; and our recent acquisition. We opened one new office outside of the United States in 2017. 2016 Compared to 2015 In 2016, Base Revenue increased by $108.7 million, or 79%, compared to 2015, and represented 89% and 82% of total revenue in 2016 and 2015, respectively. This increase was primarily attributable to an increase in the usage of all our products, particularly our Programmable Messaging products and Programmable Voice products, and the adoption of additional products by our existing customers. This increase was partially offset by pricing decreases that we have implemented over time for our customers in the form of lower usage prices in an effort to increase the reach and scale of our platform. The changes in usage and price in 2016 were reflected in our Dollar-Based Net Expansion Rate of 161%. The increase in usage was also attributable to a 44% increase in the number of Active Customer Accounts, from 25,347 as of December 31, 2015 to 36,606 as of December 31, 2016. F o r m 1 0 - K 69 In 2016, Variable Revenue increased by $1.7 million, or 6%, compared to 2015, and represented 11% and 18% of total revenue in 2016 and 2015, respectively. This increase was primarily attributable to the increase in the usage of products by our existing Variable Customer Accounts, partially offset by the decrease in number of Variable Customer Accounts from nine to eight. U.S. revenue and international revenue represented $233.9 million, or 84%, and $43.4 million, or 16%, respectively, of total revenue in 2016, compared to $143.1 million, or 86%, and $23.8 million, or 14%, respectively, of total revenue in 2015. The increase in international revenue in absolute dollars and as a percentage of total revenue was attributable to the growth in usage of our products, particularly our Programmable Messaging products and Programmable Voice products, by our existing international Active Customer Accounts, and to a 61% increase in the number of international Active Customer Accounts, driven in part by our focus on expanding our sales to customers outside of the United States. We opened one office outside of the United States in 2016. Cost of Revenue and Gross Margin Cost of revenue . . . . . . . . . . . . . . . . . . Gross margin . . . . . . . . . . . . . . . . . . . . $182,895 $120,520 (Dollars in thousands) $62,375 $74,454 54% 57% 55% 52% $46,066 62% Year Ended December 31, 2017 2016 2015 2016 to 2017 Change 2015 to 2016 Change 2017 Compared to 2016 In 2017, cost of revenue increased by $62.4 million, or 52%, compared to 2016. The increase in cost of revenue was primarily attributable to a $51.3 million increase in network service providers’ costs, a $4.8 million increase in cloud infrastructure fees to support the growth in usage of our products and a $5.5 million increase in amortization expense for internal use software. In 2017, gross margin declined primarily as a result of an increasing mix of international product usage and certain price adjustments that were made by us as a result of Uber’s high volume growth. 2016 Compared to 2015 In 2016, cost of revenue increased by $46.1 million, or 62%, compared to 2015. The increase in cost of revenue was primarily attributable to a $40.0 million increase in network service providers’ costs, a $2.8 million increase in cloud infrastructure fees to support the growth in usage of our products and a $1.9 million increase in amortization expense for internal use software. In 2016, gross margin improved primarily as a result of cost savings from our continued platform optimization efforts, along with changes in our product and geographic mix. Operating Expenses Year Ended December 31, 2017 2016 2015 2016 to 2017 Change 2015 to 2016 Change (Dollars in thousands) Research and development Sales and marketing . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . Charitable contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,739 $ 77,926 $ 42,559 $42,813 55% $35,367 83% 35,402 54% 15,959 32% 42% 8,542 17% 15,086 — (2,688) (70)% 3,860 100% 100,669 59,619 1,172 65,267 51,077 3,860 49,308 35,991 Total operating expenses . . . . . . . . . . . . . . $282,199 $198,130 $127,858 $84,069 42% $70,272 55% 70 2017 Compared to 2016 In 2017, research and development expenses increased by $42.8 million, or 55%, compared to 2016. The increase was primarily attributable to a $30.3 million increase in personnel costs, net of a $7.7 million increase in capitalized software development costs, largely as a result of a 37% average increase of our research and development headcount, as we continued to focus on enhancing our existing products and introducing new products, as well as enhancing product management and other technical functions. The increase was also due in part to a $3.0 million increase in software subscription expense, a $2.7 million increase in cloud infrastructure fees to support the staging and development of our products, a $1.5 million increase in outsourced engineering services, a $1.4 million increase in amortization expense related to our internal-use software and the intangible assets acquired through business combinations, a $0.7 million increase related to employee travel and a $0.7 million increase in professional fees. In 2017, sales and marketing expenses increased by $35.4 million, or 54%, compared to 2016. The increase was primarily attributable to a $25.5 million increase in personnel costs, largely as a result of a 42% average increase in sales and marketing headcount as we continued to expand our sales efforts in the United States and internationally, a $1.9 million increase in credit card processing fees due to increased volumes, a $1.4 million increase in advertising expenses, a $1.2 million increase in professional services fees, a $1.2 million increase in employee travel expenses, a $1.1 million increase in software subscription expense, a $1.2 million increase in depreciation and amortization and a $0.4 million increase related to our SIGNAL developer conferences. In 2017, general and administrative expenses increased by $8.5 million, or 17%, compared to 2016. The increase was primarily attributable to a $16.1 million increase in personnel costs, largely as a result of a 33% average increase in general and administrative headcount to support the growth of our business domestically and internationally, a $4.3 million increase in professional services fees primarily related to our operations as a public company and our on-going litigation matters, a $2.6 million increase in facilities and insurance costs, a $0.5 million increase related to software licenses. These increases were partially offset by the release of $12.6 million tax liability upon certain obligation settlements and estimate revisions, discussed in detail in Note 10 (d) of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and a $3.4 million decrease in the state and other taxes expense as we began collecting those taxes in certain jurisdictions starting in March 2017, which allowed us to reduce the ongoing rate of accrual. In 2017, Twilio.org donated 45,383 shares of Class A common stock with a value of $1.2 million to an independent Donor Advised Fund to further our philanthropic goals. 2016 Compared to 2015 In 2016, research and development expenses increased by $35.4 million, or 83%, compared to 2015. The increase was primarily attributable to a $27.3 million increase in personnel costs, net of a $4.4 million increase in capitalized software development costs, largely as a result of a 61% average increase of our research and development headcount, as we continued to focus on enhancing our existing products and introducing new products, as well as enhancing product management and other technical functions. The increase was also due in part to a $1.9 million increase related to the facilities rent expense in connection with our new office lease in San Francisco, California, a $1.7 million increase in cloud infrastructure fees to support the staging and development of our products, a $1.2 million increase in amortization expense related to our internal-use software and the intangible assets acquired through business combinations and a $1.2 million increase in software subscription expense. These increases were partially offset by a $0.8 million decrease in compensation expense related to the 2015 Repurchase, which was not incurred in 2016. 71 F o r m 1 0 - K In 2016, sales and marketing expenses increased by $16.0 million, or 32%, compared to 2015. The increase was primarily attributable to a $9.4 million increase in personnel costs, largely as a result of a 35% average increase in sales and marketing headcount as we continued to expand our sales efforts in the United States and internationally, a $1.6 million increase in credit card processing fees due to increased volumes, a $0.8 million increase in the software subscription expense, a $0.8 million increase in the facilities rent expense primarily due to our new office lease in San Francisco, California, a $0.7 million increase related to our SIGNAL developer conferences, a $0.6 million increase in advertising expenses, a $0.6 million increase in professional services fees and a $0.6 million increase in employee travel expenses. In 2016, general and administrative expenses increased by $15.1 million, or 42%, compared to 2015. The increase was primarily attributable to a $7.7 million increase in personnel costs, largely as a result of a 41% average increase in general and administrative headcount to support the growth of our business and becoming a publicly-traded company, a $4.9 million increase in sales and other taxes, a $1.4 million increase in depreciation, amortization and facilities rent primarily due to our new office lease in San Francisco, California and a $0.9 million increase in professional service fees unrelated to business combinations. These increases were partially offset by a $1.1 million decrease in compensation expense related to the 2015 Repurchase, which was not incurred in 2016, a $0.8 million decrease related to the partial reversal of previously recorded tax liability upon settlement of the obligation and a $0.7 million decrease in professional services fees related to business combinations. In 2016, of the net proceeds we received in our follow-on public offering, $3.9 million was reserved to fund and support the operations of Twilio.org. In December 2016, Twilio.org donated the full $3.9 million proceeds into an independent Donor Advised Fund to further our philanthropic goals. Quarterly Results of Operations The following tables set forth our unaudited quarterly statements of operations data for each of the eight quarters ended December 31, 2017, as well as the percentage that each line item represents of our revenue for each quarter presented. The information for each quarter has been prepared on a basis consistent with our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair presentation of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be 72 expected in the future. The following quarterly financial data should be read in conjunction with our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Three Months Ended March 31, 2016 June 30, 2016 Sept. 30, 2016 Dec. 31, March 31, 2016 2017 June 30, 2017 Sept. 30, 2017 Dec. 31, 2017 (Unaudited, in thousands) Consolidated Statements of Operations: Revenue . . . . . . . . . . . . . . . $59,340 Cost of revenue(1)(2) 26,827 . . . . . . . $ 64,510 $ 71,533 $ 81,952 34,205 31,285 28,203 $ 87,372 37,286 $95,870 $100,542 $115,236 55,022 48,254 42,333 Gross profit . . . . . . . . . . 32,513 36,307 40,248 47,747 50,086 53,537 52,288 60,214 Operating expenses: Research and development(1)(2) . . . . . . Sales and marketing(1)(2) . . . General and administrative(1)(2) . . . . . . Charitable contribution . . . 14,864 13,422 10,593 — 17,369 18,156 21,106 15,873 24,587 17,816 26,522 21,116 29,714 26,153 11,635 — 14,545 — 14,304 3,860 17,203 — 4,740 — Total operating expenses . 38,879 47,160 51,524 60,567 64,841 60,607 31,674 25,778 18,867 — 76,319 32,829 27,622 18,809 1,172 80,432 Loss from operations . . . Other income (expense), net . (6,366) (18) (10,853) (28) (11,276) 138 (12,820) 225 (14,755) 498 (7,070) 471 (24,031) 1,000 (20,218) 1,102 Loss before (provision) benefit for income taxes . . . . . . . . . . . . . (Provision) benefit for income taxes . . . . . . . . . . . . . . . . (6,384) (10,881) (11,138) (12,595) (14,257) (6,599) (23,031) (19,116) (84) (113) (116) (13) 30 (510) (422) 197 Net loss attributable to common stockholders . . . . $ (6,468) $(10,994) $(11,254) $(12,608) (14,227) $ (7,109) $ (23,453) $ (18,919) (1) Includes stock-based compensation expense as follows March 31, 2016 June 30, Sept. 30, Dec. 31, March 31, 2016 2016 2016 2017 Three Months Ended (Unaudited, in thousands) June 30, Sept. 30, Dec. 31, 2017 2017 2017 Cost of revenue . . . . . . . . . . . . . . Research and development . . . . . . Sales and marketing . . . . . . . . . . . General and administrative . . . . . . $ 23 1,516 734 752 $ 28 2,379 1,116 1,453 $ 84 3,741 1,432 2,391 $ 156 5,310 1,690 1,420 $ 138 4,484 1,995 2,768 $ 142 $ 180 $ 5,710 2,363 4,185 6,493 2,603 4,912 190 6,121 2,861 4,474 Total . . . . . . . . . . . . . . . . . . . . $3,025 $4,976 $7,648 $8,576 $9,385 $12,400 $14,188 $13,646 73 F o r m 1 0 - K (2) Includes amortization of acquired intangibles as follows: Three Months Ended March 31, 2016 June 30, 2016 Sept. 30, 2016 Dec. 31, March 31, 2016 2017 June 30, 2017 Sept. 30, 2017 Dec. 31, 2017 (Unaudited, in thousands) Cost of revenue . . . . . . . . Research and development . Sales and marketing . . . . . General and administrative . Total . . . . . . . . . . . . . . . . $ 70 38 — 27 $135 $ 70 38 — 28 $136 $ 70 38 — 28 $136 $409 37 — 27 $473 $ 997 38 117 24 $1,176 $1,182 38 202 20 $1,250 25 220 20 $1,215 38 214 20 $1,442 $1,515 $1,487 March 31, 2016 June 30, 2016 Sept. 30, 2016 Dec. 31, March 31, 2016 2017 June 30, 2017 Sept. 30, 2017 Dec. 31, 2017 Three Months Ended (Unaudited) 100% 45 100% 44 100% 44 100% 42 100% 43 100% 44 100% 48 100% 48 Consolidated Statements of Operations, as a percentage of revenue:** Revenue . . . . . . . . . . . . . . . Cost of revenue . . . . . . . . . . Gross margin . . . . . . . . Operating expenses: Research and development Sales and marketing . . . . . General and administrative Charitable contribution . . . Total operating expenses 55 25 23 18 — 66 56 27 28 18 — 73 56 30 22 20 — 72 58 30 22 17 5 74 57 30 24 20 — 74 Loss from operations . . . Other income (expense), net . (11) * (17) * (16) * (16) * (17) 1 Loss before (provision) benefit for income taxes . . . . . . . . . . . . (Provision) benefit for (11) (17) (16) (15) (16) income taxes . . . . . . . . . . * * * * * Net loss attributable to 56 31 27 5 — 63 (7) * (7) (1) 52 32 26 19 — 76 52 28 24 16 1 70 (24) 1 (18) 1 (23) (17) * * common stockholders . . . . (11)% (17)% (16)% (15)% (16)% (8)% (23)% (17)% * Less than 0.5% of revenue. 74 ** Columns may not add up to 100% due to rounding. March 31, 2016 June 30, 2016 Sept. 30, 2016 Dec. 31, March 31, 2016 2017 June 30, 2017 Sept. 30, 2017 Dec. 31, 2017 (Unaudited, dollars in thousands) Three Months Ended Number of Active Customer Accounts (as of end date of period)(1) Base Revenue (in thousands)(2) . . . . . . . . Base Revenue Growth Rate . . . . . . . . . . . . Dollar-Based Net Expansion Rate(3) . . . . 28,648 30,780 34,457 36,606 40,696 43,431 46,489 48,979 $49,834 $56,370 $64,099 $75,245 $80,643 $87,583 $91,965 $105,299 92% 84% 75% 73% 62% 55% 43% 40% 170% 164% 155% 155% 141% 131% 122% 118% (1) (2) (3) See the section titled ‘‘—Key Business Metrics—Number of Active Customer Accounts.’’ See the section titled ‘‘—Key Business Metrics—Base Revenue.’’ See the section titled ‘‘—Key Business Metrics—Dollar-Based Net Expansion Rate.’’ Quarterly Trends in Revenue and Gross Margin Our quarterly revenue increased in each period presented primarily due to an increase in the usage of products as well as the adoption of additional products by our existing customers as evidenced by our Dollar-Based Net Expansion Rates, and an increase in our new customers. Our gross margin improved starting with the second quarter of 2016 due to continued platform optimization, further improved in the fourth quarter of 2016 primarily as a result of cost savings from our continued platform optimization efforts, along with changes in our product and geographic mix. In the first half of 2017, an increasing mix of international product usage offset the continued platform optimization and drove a modest decline in gross margin percentage. The trends continued in the second half of 2017, and further gross margin declines were driven by certain price adjustments that were made by us as a result of Uber’s high volume growth. Quarterly Trends in Operating Expenses Our operating expenses have generally increased sequentially as a result of our growth, primarily related to increased personnel costs to support our expanded operations, our continued investment in our products, our operations as a public company and ongoing litigations. The sales and marketing expenses included $3.2 million and $3.0 million of expenses related to our SIGNAL developer conference in the second quarter of 2017 and 2016, respectively. In 2016 and the first quarter of 2017, our general and administrative expenses included a significant amount of sales and other taxes to which we are subject. Prior to March 2017, we had not billed nor collected these taxes from our customers, and, accordingly, recorded a provision for these taxes, based on several key assumptions, when our liability was probable and the amount could be reasonably estimated. Starting in March 2017, we began collecting these taxes in certain jurisdictions and have been increasing the number of jurisdictions where these taxes are now being collected by us. In the second quarter of 2017, we revised certain key assumptions driving prior estimates based on settlements reached with various states indicating that certain revisions to these assumptions were appropriate in that period. These revisions resulted in a reversal of $12.2 million of previously accrued liability, which caused a significant decrease in our general and administrative expenses in the second quarter 2017 and resulted in a reduced rate of ongoing accrual in the third and fourth quarters of 2017. F o r m 1 0 - K 75 Liquidity and Capital Resources To date, our principal sources of liquidity have been the net proceeds of $155.5 million and $64.4 million, after deducting underwriting discounts and offering expenses paid or payable by us, from our initial public offering in June 2016 and our follow-on public offering in October 2016, respectively; the net proceeds we received through private sales of equity securities, as well as the payments received from customers using our products. From our inception through March 31, 2016, we completed several rounds of equity financing through the sale of our convertible preferred stock for total net proceeds of $237.1 million. We believe that our cash, cash equivalents and marketable securities balances, as well as the cash flows generated by our operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in Part I, Item 1A, ‘‘Risk Factors.’’ We may be required to seek additional equity or debt financing in order to meet these future capital requirements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected. Credit Facility In March 2015, we entered into a $15.0 million revolving line of credit with Silicon Valley Bank which expired in March 2017 and was not renewed. We never borrowed under this credit facility. Cash Flows The following table summarizes our cash flows for the periods indicated (in thousands): Year Ended December 31, 2017 2016 2015 Cash provided by (used in) operating activities . . . . . . . . . . . . . . . . Cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rate changes on cash and cash equivalents . . . . . . $ (3,260) $ 10,091 (42,425) 229,164 — (223,630) 36,437 74 $ (18,762) (12,379) 107,349 — Net increase (decrease) in cash and cash equivalents . . . . . . . . . . $(190,379) $196,830 $ 76,208 Cash Flows from Operating Activities In 2017, cash used in operating activities consisted primarily of our net loss of $63.7 million adjusted for non-cash items, including $49.6 million of stock-based compensation expense, $18.8 million of depreciation and amortization expense, $1.2 million of charitable donations and $10.2 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts payable and other current liabilities increased $2.1 million and deferred revenue increased $3.6 million due to increases in transaction volumes, which were partially offset by the $13.4 million release of tax liability upon certain obligation settlements and estimate revisions, discussed in detail in Note 10 (d) of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Accounts receivable and prepaid expenses increased $13.2 million, which resulted primarily from the timing of cash receipts from certain of our larger customers, pre-payments for cloud infrastructure fees and certain operating expenses. In 2016, cash provided by operating activities consisted primarily of our net loss of $41.3 million adjusted for non-cash items, including $24.2 million of stock-based compensation expense, $8.3 million 76 of depreciation and amortization expense and $16.9 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts payable and other liabilities increased $25.9 million and deferred revenue increased $4.1 million, which were primarily due to increases in transaction volumes and additional accruals of sales and other taxes. Other long-term liabilities increased $9.1 million, primarily due to the increase in the deferred rent balance related to our new office lease in San Francisco, California. This was partially offset by an increase in accounts receivable and prepaid expenses of $22.0 million, which primarily resulted from the growth of our business and the timing of cash receipts from certain of our larger customers, pre-payments for cloud infrastructure fees and certain operating expenses, and a $5.7 million net increase related to the tenant improvement allowance under our new San Francisco, California office lease, after collecting $2.6 million from the landlord in the fourth quarter of 2016. In 2015, cash used in operating activities consisted primarily of our net loss of $35.5 million adjusted for non-cash items, including $8.9 million of stock-based compensation expense, $4.2 million of depreciation and amortization expense and $2.9 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts payable and other liabilities increased $13.9 million and deferred revenue increased $2.0 million, which were primarily due to increases in transaction volumes and additional accruals of sales and other taxes. This was partially offset by an increase in accounts receivable and prepaid expenses of $12.6 million, which primarily resulted from the growth of our business and the timing of cash receipts from certain of our larger customers, as well as pre-payments for cloud infrastructure fees and certain operating expenses. Cash Flows from Investing Activities In 2017, cash used in investing activities was $223.6 million, primarily consisting of $177.3 million of purchases of marketable securities, net of maturities, a $22.6 million payment for the acquisition of Beepsend, net of cash acquired, $17.3 million related to capitalized software development costs and $9.2 million purchases of property and equipment primarily related to the leasehold improvements under our new office lease. These outflows were partially offset by a $3.1 million release of restricted cash as a result of contractual arrangements and satisfaction of certain conditions. In 2016, cash used in investing activities was $42.4 million, primarily consisting of $14.2 million of payments related to purchases of property and equipment as we continued to expand our offices and grow our headcount to support the growth of our business, $11.5 million of payments for capitalized software development as we continued to build new products and enhance our existing products, an $8.5 million payment related to the Kurento WebRTC acquisition and a $7.4 million increase in restricted cash related to our new office lease in San Francisco, California. In 2015, cash used in investing activities was $12.4 million, primarily consisting of $8.4 million of payments for capitalized software development as we continued to build new products and enhance our existing products, $1.8 million of payments related to the acquisition of Authy, net of $1.2 million of cash acquired, and $1.7 million of payments related to purchases of property and equipment as we continued to expand our offices and grow our headcount to support the growth of our business. Cash Flows from Financing Activities In 2017, cash provided by financing activities was $36.4 million, primarily consisting of $25.6 million proceeds from stock options exercises by our employees and $11.9 million proceeds from shares issued under our employee stock purchase plan. In 2016, cash provided by financing activities was $229.2 million, primarily consisting of $225.7 million of aggregate proceeds raised in our initial public offering and follow-on public offering, net of underwriting discounts, and $9.1 million of proceeds from stock options exercises by our 77 F o r m 1 0 - K employees. These cash inflows were partially offset by $4.6 million of costs paid in connection with our public offerings. In 2015, cash provided by financing activities was $107.3 million, primarily consisting of $125.4 million proceeds from our sales of Series E convertible preferred stock, net of issuance expenses, and $3.4 million proceeds from stock option exercises by our employees. This was partially offset by the $20.8 million of payments made in connection with our 2015 Repurchase and $0.7 million of payments for deferred offering costs. Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities. Contractual Obligations and Other Commitments The following table summarizes our non-cancelable contractual obligations as of December 31, 2017: Less Than 1 Year 1 to 3 Years 3 to 5 Years 5 Years or More Total (In thousands) As of December 31, 2017: Operating leases(1) . . . . . . . . . . . . . . . . . . . . . . . . . Purchase obligations(2) . . . . . . . . . . . . . . . . . . . . . . $ 7,884 22,414 $14,777 25,673 $12,897 23 $10,189 $45,747 — 48,110 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,298 $40,450 $12,920 $10,189 $93,857 (1) Operating leases represent total future minimum rent payments under non-cancelable operating lease agreements. (2) Purchase obligations represent total future minimum payments under contracts with our cloud infrastructure provider, network service providers and other vendors. Purchase obligations exclude agreements that are cancelable without penalty. Unrecognized tax benefits are not included in the table above because any amounts expected to be settled in cash are not material. We have one business activity and operate in one reportable segment. Segment Information Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in U.S. GAAP. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. In many instances, we could have reasonably used different accounting estimates and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Actual results could differ significantly from our estimates. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving our judgments and estimates. 78 Revenue Recognition We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collection is reasonably assured. We consider a signed contract or other similar documentation reflecting the terms and conditions under which products will be provided to be persuasive evidence of an arrangement. Collectability is assessed based on a number of factors, including payment history and the creditworthiness of a customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. Usage-based fees are recognized as products are delivered. Term-based fees are recorded on a straight-line basis over the contractual term of the arrangement beginning on the date when the product is made available to the customer, provided all other revenue recognition criteria are met. Our arrangements do not contain general rights of return. However, credits to customers may be issued on a case-by-case basis. Our contracts do not provide customers with the right to take possession of our software supporting the applications. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue, depending on whether the revenue recognition criteria have been met. We carry a reserve for sales credits that we calculate based on historical trends and any specific risks identified in processing transactions. Changes in the reserve are recorded against total revenue. Sales and other taxes collected from customers to be remitted to government authorities are excluded from revenue. Stock-Based Compensation We account for stock-based compensation in accordance with the authoritative guidance on stock compensation. Under the fair value recognition provisions of this guidance, stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, over the requisite service period, which is generally the vesting period of the respective award. Under the old guidance, the stock-based compensation was recorded net of estimated forfeitures. In March 2016, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Update (‘‘ASU’’) No. 2016-09, ‘‘Compensation—Stock Compensation (Topic 718): Improvements to Employee Share -Based Payment Accounting.’’ This new guidance is intended to simplify several areas of accounting for stock-based compensation arrangements, including accounting for forfeitures, the income tax impact and classification on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We early adopted this guidance in the quarter ended December 31, 2016. The new guidance allows entities to account for forfeitures as they occur. We elected to account for forfeitures as they occur and adopted this provision on a modified retrospective basis. The $0.1 million of cumulative prior years’ impact as well as the impact on the first three quarters of 2016 of $75,000 was recognized as an increase to stock-based compensation during the quarter ended December 31, 2016, as the impact on prior periods was insignificant. Further, recognition of the previously unrecognized excess tax benefits resulted in the recognition of a tax benefit of $62,000 in our consolidated statement of operations in the fourth quarter of 2016. Adoption of all other changes in the new guidance did not have a significant impact on our consolidated financial statements. Prior to our initial public offering (‘‘IPO’’) in June 2016, we granted restricted stock units (‘‘Pre-IPO RSUs’’) under our 2008 Stock Option Plan (the ‘‘2008 Plan’’) to our employees that vested upon the satisfaction of both a service condition and a liquidity condition. The service condition for the majority of these awards will be satisfied over four years. The liquidity condition was satisfied upon occurrence of our IPO in June 2016. RSUs granted on or after the completion of our IPO (‘‘Post-IPO 79 F o r m 1 0 - K RSUs’’) are under our 2016 Stock Options Incentive Plan (the ‘‘2016 Plan’’) and vest upon the satisfaction of a time based service condition. The compensation expense related to these grants is based on the grant date fair value of the RSUs and is recognized on a ratable basis over the applicable service period. The majority of Post-IPO RSUs are earned over a service period of two to four years. Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options and purchase rights under our 2016 Employee Stock Purchase Plan (the ‘‘2016 ESPP’’) granted to our employees and directors. The grant date fair value of restricted stock units is determined using the fair value of our common stock on the date of grant. Prior to our initial public offering, the fair value of our Class A common stock was determined by the estimated fair value at the time of grant. After our initial public offering, we use the market closing price of our Class A common stock as reported on the New York Stock Exchange for the fair value. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated Class A common stock fair value as well as assumptions regarding a number of other variables. These variables include our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates, and expected dividends, which are estimated as follows: • Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. We use the simplified calculation of expected term, as we do not have sufficient historical data to use any other method to estimate expected term. • Expected volatility. The expected volatility is derived from an average of the historical volatilities of the common stock of several entities with characteristics similar to ours, such as the size, and operational and economic similarities to our principle business operations. We use this method because we have limited information on the volatility of our Class A common stock because of our short trading history. • 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 expected term of the stock-based awards. • Expected dividend. The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock. In February 2017, we granted performance-based stock options that vest upon satisfaction of certain performance conditions. These stock options were valued using the Monte-Carlo simulation model. 80 The following table summarizes the assumptions used in the Black Scholes option-pricing model to determine the fair value of our stock options, as follows: Employee Stock Options Fair value of common stock . . . . . . . . . . . . Expected term (in years) . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . Dividend rate . . . . . . . . . . . . . . . . . . . . . . . Employee Stock Purchase Plan Expected term (in years) . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . Dividend rate . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2017 2016 2015 $23.60 - $31.96 6.08 44.3% - 47.6% 1.9% - 2.3% 0% $10.09 - $15.00 6.08 51.4% - 53.0% 1.3% - 1.5% 0% $7.07 - $10.09 6.08 47.8% - 54.9% 1.4% - 2.0% 0% 0.5 33.2% - 33.9% 1.1% - 1.4% 0% 0.90 52% 0.6% 0% — — — — The following assumptions were used in the Monte Carlo simulation model to estimate the fair value and the derived service period of the performance options: Asset volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock price at grant date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40% 45% 14% $31.72 Internal-Use Software Development Costs We capitalize certain costs related to the development of our platform and other software applications for internal use. In accordance with authoritative guidance, we begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. We stop capitalizing these costs when the software is substantially complete and ready for its intended use, including the completion of all significant testing. These costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three years. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditure will result in additional functionality and expense costs incurred for maintenance and minor upgrades and enhancements. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded within product development expenses in our consolidated statements of operations. We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our platform, assess the ongoing value of capitalized assets or determine the estimated useful lives over which the costs are amortized, the amount of internal-use software development costs we capitalize and amortize could change in future periods. F o r m 1 0 - K 81 Contingencies We conduct operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income-based taxes, such as sales and use and telecommunications taxes are assessed on our operations. We are subject to indirect taxes, and may be subject to certain other taxes, in some of these jurisdictions. Prior to March 2017, we did not bill nor collect these taxes from our customers and, in accordance with U.S. GAAP, we recorded a provision for the tax exposure in these jurisdictions when it was both probable that a liability had been incurred and the amount of the exposure could be reasonably estimated. These estimates included several key assumptions including, but not limited to, the taxability of our services, the jurisdictions in which we believed we had nexus, and the sourcing of revenues to those jurisdictions. Effective March 2017, we began collecting these taxes from customers in certain jurisdictions and since then, we have expanded the number of jurisdictions where these taxes are being collected. We expect to continue to expand the number of jurisdictions where these taxes will be collected in the future. Simultaneously, we have been and continue to be in discussions with certain states regarding prior state sales and other taxes, if any, that we may owe. During 2017, we revised our estimates of our tax exposure based on settlements reached with various states, which indicated that certain revisions to our key assumptions including, but not limited to, the sourcing of revenue and the taxability of our services were appropriate in the current period. In the year ended December 31, 2017, the total impact of these changes on the net loss attributable to common stockholders was a reduction of $13.4 million. As of December 31, 2017, the total liability related to these taxes was $20.9 million. In the event other jurisdictions challenge our assumptions and analysis, the actual exposure could differ materially from the current estimates. Recent Accounting Pronouncements Not Yet Adopted See Note 2(aa) to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements not yet adopted. Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are exposed to certain market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities as follows: Interest Rate Risk We had cash and cash equivalents of $115.3 million and marketable securities of $175.6 million as of December 31, 2017. Cash and cash equivalents consist of bank deposits and money market funds. Marketable securities consist of U.S. treasury securities and high credit quality corporate debt securities. The cash and cash equivalents and marketable securities are held for working capital purposes. Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short-term nature of our investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements. 82 Currency Exchange Risks The functional currency of our foreign subsidiaries is the U.S. dollar and the Euro. Therefore, we are exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars. The local currencies of our foreign subsidiaries are the British pound, the Euro, the Colombian peso, the Singapore dollar, the Hong Kong dollar and the Swedish Krona. Our subsidiaries remeasure monetary assets and liabilities at period-end exchange rates, while non-monetary items are remeasured at historical rates. Revenue and expense accounts are remeasured at the average exchange rate in effect during the year. If there is a change in foreign currency exchange rates, the conversion of our foreign subsidiaries’ financial statements into U.S. dollars would result in a realized gain or loss which is recorded in our consolidated statements of operations. We do not currently engage in any hedging activity to reduce our potential exposure to currency fluctuations, although we may choose to do so in the future. A hypothetical 10% change in foreign exchange rates during any of the periods presented would not have had a material impact on our consolidated financial statements. F o r m 1 0 - K 83 Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Comprehensive Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 85 88 89 90 91 92 93 84 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Twilio Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Twilio Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2018 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company’s auditor since 2013. San Francisco, California March 1, 2018 F o r m 1 0 - K 85 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Twilio Inc.: Opinion on Internal Control Over Financial Reporting We have audited Twilio Inc.and subsidiaries (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated March 1, 2018 expressed an unqualified opinion on those consolidated financial statements. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to obtaining or generating relevant quality information to support the design and functioning of control activities over the accounting for capitalized software has been identified and included in management’s assessment. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2017 consolidated financial statements, and this report does not affect our report on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 86 Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP San Francisco, California March 1, 2018 F o r m 1 0 - K 87 TWILIO INC. Consolidated Balance Sheets (In thousands, except share and per share amounts) As of December 31, 2017 2016 ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 115,286 175,587 43,113 19,279 $ 305,665 — 26,203 21,512 Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353,265 5,502 50,541 20,064 17,851 2,559 353,380 7,445 37,552 10,268 3,565 484 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 449,782 $ 412,694 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,116 53,614 13,797 $ Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,527 11,409 89,936 4,174 59,308 10,222 73,704 9,543 83,247 Commitments and contingencies (Note 10) Stockholders’ equity: Preferred stock, $0.001 par value, 100,000,000 shares authorized, none issued Common stock, $0.001 par value per share: Authorized shares 1,100,000,000 as of December 31, 2017 and 2016; Issued and outstanding shares 93,969,796 and 87,248,548 as of December 31, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 94 608,165 2,025 (250,438) 87 516,090 — (186,730) Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359,846 329,447 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . $ 449,782 $ 412,694 See accompanying notes to consolidated financial statements. 88 TWILIO INC. Consolidated Statements of Operations (In thousands, except share and per share amounts) Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Research and development . . . . . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . Charitable contribution . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expenses), net . . . . . . . . . . . . . . . . . . . . . . . Loss before provision for income taxes . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deemed dividend to investors in relation to tender offer . . . . Net loss attributable to common stockholders . . . . . . . . . . Net loss per share attributable to common stockholders, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ Year Ended December 31, 2017 2016 2015 $ 399,020 182,895 216,125 277,335 120,520 156,815 $ 166,919 74,454 92,465 120,739 100,669 59,619 1,172 282,199 (66,074) 3,071 (63,003) (705) (63,708) — 77,926 65,267 51,077 3,860 42,559 49,308 35,991 — 198,130 127,858 (41,315) 317 (40,998) (326) (41,324) — (35,393) 11 (35,382) (122) (35,504) (3,392) (63,708) $ (41,324) $ (38,896) (0.70) $ (0.78) $ (2.19) 91,224,607 53,116,675 17,746,526 F o r m 1 0 - K See accompanying notes to consolidated financial statements. 89 TWILIO INC. Consolidated Statements of Comprehensive Loss (In thousands) Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income: Unrealized loss on marketable securities . . . . . . . . . . . . . . . . . . . . . Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2017 2016 2015 $(63,708) $(41,324) $(38,896) (598) 2,623 2,025 — — — — — — Comprehensive loss attributable to common stockholders . . . . . $(61,683) $(41,324) $(38,896) See accompanying notes to consolidated financial statements. 90 ’ s r e d l o h k c o t s d e t a l u m u c c A e v i s n e h e r p m o C y t i u q e t i c i f e d e m o c n I l a t o T d e t a l u m u c c A r e h t O l a n o i t i d d A n i - d i a p l a t i p a c n o m m o C B s s a l C — k c o t S n o m m o C A s s a l C — k c o t S e l b i t r e v n o C k c o t s d e r r e f e r p t n u o m A s e r a h S t n u o m A s e r a h S t n u o m A s e r a h S . C N I O I L I W T y t i u q E ’ s r e d l o h k c o t S f o s t n e m e t a t S d e t a d i l o s n o C ) s t n u o m a e r a h s t p e c x e , s d n a s u o h t n I ( 6 4 8 , 9 5 3 $ ) 8 3 4 , 0 5 2 ( $ 5 2 0 , 2 $ 5 6 1 , 8 0 6 $ 4 2 $ 6 4 2 , 3 6 0 , 4 2 0 7 $ 0 5 5 , 6 0 9 , 9 6 ) 4 0 5 , 5 3 ( 4 9 1 , 1 3 $ ) 4 0 5 , 5 3 ( ) 4 3 4 , 9 8 ( $ — 1 0 2 8 2 1 , 3 ) 2 9 3 , 3 ( ) 3 9 3 , 7 1 ( — 6 5 8 , 9 7 8 0 , 3 8 4 4 , 5 2 1 5 2 6 , 6 1 1 ) 4 2 3 , 1 4 ( 6 2 4 , 0 6 1 ) 0 3 7 , 5 ( 1 8 2 , 5 6 — 2 9 3 , 8 — 6 3 6 ) 7 3 0 , 1 ( — — — — 8 7 1 , 6 2 ) 8 0 7 , 3 6 ( 7 4 4 , 9 2 3 7 9 5 , 5 2 — 8 7 3 ) 8 7 6 ( — — 2 7 1 , 1 8 1 9 , 1 1 ) 0 0 1 ( ) 8 9 5 ( 3 2 6 , 2 5 9 7 , 3 5 — — — ) 2 9 3 , 3 ( ) 6 7 0 , 7 1 ( — — — — ) 4 2 3 , 1 4 ( ) 6 0 4 , 5 4 1 ( — — — — — — — — — — — — — — — — — — — — — — — — — ) 8 0 7 , 3 6 ( ) 0 3 7 , 6 8 1 ( — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — ) 8 9 5 ( 3 2 6 , 2 $ 0 2 9 , 8 $ — — — — — — — 1 0 2 6 2 1 , 3 6 5 8 , 9 — 3 0 1 , 2 2 4 1 4 , 0 6 1 ) 0 3 7 , 5 ( 9 7 2 , 5 6 — 6 3 6 ) 7 3 0 , 1 ( 0 9 3 , 8 7 5 8 , 9 3 2 — — — — 8 7 1 , 6 2 — 1 9 5 , 5 2 0 9 0 , 6 1 5 — 8 7 3 ) 8 7 6 ( — — ) 0 0 1 ( 2 7 1 , 1 7 1 9 , 1 1 — — 5 9 7 , 3 5 7 1 — 2 — — — — 4 7 8 , 0 7 8 1 3 , 6 9 6 , 1 ) 2 ( ) 6 5 1 , 9 6 8 , 1 ( — — — — — 7 1 — — — — 2 4 5 — — — — — — — — — — — — ) 4 8 0 , 0 2 ( 3 0 0 , 4 2 3 , 7 1 — 5 4 3 , 8 6 ) 6 3 0 , 7 2 ( 5 6 3 , 6 2 1 7 8 2 , 8 6 1 , 2 1 4 4 , 8 0 5 , 4 5 ) 7 3 ( ) 8 8 5 , 7 8 7 , 6 3 ( — — — 6 3 — 6 — — — — — ) 5 2 6 , 1 ( ) 4 5 0 , 7 2 1 ( — ) 8 3 5 , 2 2 ( 5 5 2 , 1 5 3 0 1 5 , 2 2 — 9 3 5 , 6 8 1 , 5 8 3 1 , 2 5 2 , 7 3 — — — — — — — — — — — ) 9 5 1 , 6 1 ( ) 8 1 ( ) 9 9 4 , 0 1 7 , 8 1 ( — — — — — — — — — — — — 2 1 2 — — — — — — — 7 3 — — — 1 5 — — — — — — 8 1 1 — — — — — $ 1 5 0 , 6 4 4 , 7 1 — $ — — — — — — — — — — — — — — — — — 0 0 0 , 0 0 5 , 1 1 2 2 2 , 1 9 6 , 1 — — — — ) 8 7 5 , 1 ( 8 7 1 , 9 1 8 8 5 , 7 8 7 , 6 3 — — — 0 1 4 , 6 9 9 , 9 4 6 1 1 , 0 6 3 — 3 8 3 , 5 4 2 4 1 , 4 9 7 9 9 4 , 0 1 7 , 8 1 — — — — — — — — — — — — 1 9 6 , 1 1 1 $ 0 9 4 , 2 8 4 , 2 4 ) 5 1 3 ( ) 6 1 9 , 5 6 3 ( — — — 7 8 0 , 3 8 4 4 , 5 2 1 — — — 8 1 6 , 7 9 8 9 4 2 , 4 9 4 , 1 1 1 1 9 , 9 3 2 1 4 4 , 8 0 5 , 4 5 — — — — — — — — ) 1 1 9 , 9 3 2 ( ) 1 4 4 , 8 0 5 , 4 5 ( — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s n o i t p o k c o t s d e s i c r e x e y l r a e f o g n i t s e V . . . s n o i t p o k c o t s d e t s e v n u f o s e s i c r e x E r e f f o r e d n e t n i s e r a h s f o e s a h c r u p e R . . . . . . . . . . . . . . . . . . . . . . . . s s o l t e N s n o i t p o k c o t s d e t s e v f o e s i c r e x E 4 1 0 2 , 1 3 r e b m e c e D f o s a e c n a l a B r e f f o r e d n e t o t n o i t a l e r n i d n e d i v i d d e m e e D . . . s n o i t p o k c o t s d e t s e v n u f o s e s a h c r u p e R ) n o i l l i m 6 . 4 $ f o s t s o c e c n a u s s i f o t e n ( k c o t s d e r r e f e r p e l b i t r e v n o c n o i t i s i u q c a n i k c o t S d e r r e f e r p e l b i t r e v n o c T E s e i r e S s e i r e S f o f o e c n a u s s I e c n a u s s I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . n o i t a s n e p m o c d e s a b - k c o t S . . . . . . . . . . . . s s o l t e N 5 1 0 2 , 1 3 r e b m e c e D f o s a e c n a l a B s t n u o c s i d g n i t i r w r e d n u f o t e n , g n i r e f f O c i l b u P l a i t i n I g n i t i r w r e d n u f o t e n , g n i r e f f O c i l b u P n O w o - l l o F h t i w h t i w n o i t c e n n o c n o i t c e n n o c n i n i k c o t s n o m m o c k c o t s n o m m o c f o f o e c n a u s s I e c n a u s s I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s t n u o c s i d s g n i r e f f o c i l b u p o t d e t a l e r s t s o C c i l b u p l a i t i n i e h t h t i w n o i t c e n n o c n i k c o t s n o m m o c o t k c o t s d e r r e f e r p e l b i t r e v n o c f o n o i s r e v n o C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g n i r e f f o s n o i t p o k c o t s d e t s e v f o s e s i c r e x E s n o i t p o k c o t s d e s i c r e x e y l r a e . . . . s t i n u k c o t s d e t c i r t s e r f o f o g n i t s e V g n i t s e V y t i l i b a i l x a t r o f d l e h h t i w s d r a w a y t i u q e f o e u l a V . . . . . . s n o i t p o k c o t s d e t s e v n u f o s e s i c r e x E k c o t s n o m m o c A s s a l C f o s e r a h s o t n i k c o t s n o m m o c B s s a l C f o s e r a h s f o n o i s r e v n o C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s n o i t p o k c o t s d e t s e v n u f o s e s a h c r u p e R . . . . . . . . . . . n o i t a s n e p m o c d e s a b - k c o t S r e u s s i e h t o t d e n r u t e r s e r a h s w o r c s E . . . . . . s n o i t p o k c o t s d e t s e v f o s e s i c r e x E . . . . . . . . . . . . . . s s o l t e N 6 1 0 2 , 1 3 r e b m e c e D f o s a e c n a l a B s n o i t p o k c o t s d e s i c r e x e y l r a e . . . . s t i n u k c o t s d e t c i r t s e r f o f o g n i t s e V g n i t s e V y t i l i b a i l x a t r o f d l e h h t i w s d r a w a y t i u q e f o e u l a V . . . . . . s n o i t p o k c o t s d e t s e v n u f o s e s i c r e x E k c o t s n o m m o c A s s a l C f o s e r a h s o t n i k c o t s n o m m o c B s s a l C f o s e r a h s f o n o i s r e v n o C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . k c o t s n o m m o c d e t a n o D P P S E r e d n u d e u s s i s e r a h S s n o i t p o k c o t s d e t s e v n u f o s e s a h c r u p e R s e i t i r u c e s e l b a t e k r a m n o s s o l d e z i l a e r n U . . . . . . . . . . . . . . . . . . . n o i t a l s n a r t y c n e r r u c n g i e r o F . n o i t a s n e p m o c d e s a b - k c o t S 7 1 0 2 , 1 3 r e b m e c e D f o s a e c n a l a B 91 . s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c o t s e t o n g n i y n a p m o c c a e e S F o r m 1 0 - K TWILIO INC. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2017 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net loss to net cash provided by (used in) operating activities: $ (63,708) $ (41,324) $ (35,504) Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of bond premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Value of donated common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax benefit related to acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Write-off of internal-use software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Gain) loss on lease termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term liabilities 18,764 262 49,619 1,172 580 — 561 (295) (15,280) 2,214 (1,989) 5,433 (3,312) 3,560 (841) 8,315 — 24,225 — 1,145 — 711 94 (8,254) (13,755) (135) 1,714 24,182 4,076 9,097 Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . (3,260) 10,091 CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) decrease in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturities of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized software development costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,118 (293,186) 115,877 (17,280) (9,248) (290) (22,621) (7,439) — — (11,527) (14,174) (785) (8,500) 4,226 — 8,877 — 705 (108) 113 — (10,506) (2,128) (162) 658 13,202 1,974 (109) (18,762) — — — (8,409) (1,715) (494) (1,761) Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (223,630) (42,425) (12,379) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Initial Public Offering, net of underwriting discounts . . . . . . . . . . . . . . . . Proceeds from Follow-On Public Offering, net of underwriting discounts . . . . . . . . . . . . . . Payments of costs related to public offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net proceeds from issuance of convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . Proceeds from exercises of vested options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from exercises of nonvested options Proceeds from shares issued in ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Value of equity awards withheld for tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchases of common and preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (430) — 25,597 130 11,918 (678) (100) 160,426 65,281 (4,606) — 8,392 710 — (1,037) (2) — — (694) 125,448 3,128 277 — — (20,810) Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,437 229,164 107,349 Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 74 — NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . CASH AND CASH EQUIVALENTS—Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . (190,379) 305,665 196,830 108,835 — 76,208 32,627 CASH AND CASH EQUIVALENTS—End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 115,286 $305,665 $108,835 Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NON-CASH INVESTING AND FINANCING ACTIVITIES: Purchases of property, equipment and intangible assets, accrued but not paid . . . . . . . . . . . Stock-based compensation capitalized in software development costs . . . . . . . . . . . . . . . . Vesting of early exercised options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business combination measurement period adjustments . . . . . . . . . . . . . . . . . . . . . . . . Series T convertible preferred stock issued as part of purchase price in the Authy acquisition . Costs related to public offerings, accrued but not paid . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ $ $ 605 235 4,176 378 (149) $ $ $ $ $ 225 4,201 1,953 636 $ $ $ $ — $ 46 97 979 201 — — $ — $ 3,087 — $ 430 $ 1,265 See accompanying notes to consolidated financial statements. 92 TWILIO INC. Notes to Consolidated Financial Statements 1. Organization and Description of Business Twilio Inc. (the ‘‘Company’’) was incorporated in the state of Delaware on March 13, 2008. The Company is the leader in the Cloud Communications Platform category and enables developers to build, scale and operate real-time communications within their software applications via simple-to-use Application Programming Interfaces, or API. The power, flexibility, and reliability offered by the Company’s software building blocks empower entities of virtually every shape and size to build world- class engagement into their customer experience. The Company’s headquarters are located in San Francisco, California and the Company has subsidiaries in the United Kingdom, Estonia, Ireland, Colombia, Germany, Hong Kong, Singapore, Bermuda, Spain, Sweden and Australia. Initial Public Offering In June 2016, the Company completed an initial public offering (‘‘IPO’’) in which the Company sold 11,500,000 shares of its newly authorized Class A common stock, which included 1,500,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at the public offering price of $15.00 per share. The Company received net proceeds of $155.5 million, after deducting underwriting discounts and offering expenses paid by the Company, from the sale of its shares in the IPO. Immediately prior to the completion of the IPO, all shares of common stock then outstanding were reclassified as shares of Class B common stock and all shares of convertible preferred stock then outstanding were converted into 54,508,441 shares of common stock on a one-to-one basis, and then reclassified as shares of Class B common stock. See Note 11 for further discussion of Class A and B common stock. Follow-on Public Offering In October 2016, the Company completed a follow-on public offering (‘‘FPO’’) in which the Company sold 1,691,222 shares of its Class A common stock, which included 1,050,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at a public offering price of $40.00 per share. In addition, another 6,358,778 shares of the Company’s Class A common stock were sold by the selling stockholders of the Company, which included 906,364 shares sold pursuant to the exercise of employee stock options by certain selling stockholders. The Company received aggregate proceeds of $64.4 million, after deducting underwriting discounts and offering expenses paid and payable by the Company. The Company did not receive any of the net proceeds from the sales of shares by the selling stockholders. F o r m 1 0 - K 2. Summary of Significant Accounting Policies (a) Basis of Presentation The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (‘‘U.S. GAAP’’). (b) Principles of Consolidation The consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. 93 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) (c) Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions 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 revenues and expenses during the reporting period. These estimates are used for, but not limited to, revenue allowances and returns; valuation of the Company’s stock and stock-based awards; recoverability of long-lived and intangible assets; capitalization and useful life of the Company’s capitalized internal-use software development costs; fair value of acquired intangible assets and goodwill; accruals and contingencies. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments; therefore, actual results could differ materially from those estimates. Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation. (d) Concentration of Credit Risk Financial instruments that potentially expose the Company to a concentration of credit risk consist primarily of cash, cash equivalents, marketable securities, restricted cash and accounts receivable. The Company maintains cash, cash equivalents, restricted cash and marketable securities with financial institutions that management believes are financially sound and have minimal credit risk exposure although the balances will exceed insured limits. The Company sells its services to a wide variety of customers. If the financial condition or results of operations of any significant customers deteriorate substantially, operating results could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financial condition of significant customers. The Company does not require collateral from its credit customers and maintains reserves for estimated credit losses on customer accounts when considered necessary. Actual credit losses may differ from the Company’s estimates. During the year ended December 31, 2017, there was no customer organization that accounted for more than 10% of the Company’s total revenue. During the year ended December 31, 2016, one customer organization represented approximately 14% of the Company’s total revenue. During the year ended December 31, 2015, a different customer organization represented approximately 17% of the Company’s total revenue. As of December 31, 2017, no customer organizations represented more than 10% of the Company’s gross accounts receivable. As of December 31, 2016, one customer organization represented approximately 16% of the Company’s gross accounts receivable. (e) Revenue Recognition The Company derives its revenue primarily from usage-based fees earned from customers accessing the Company’s enterprise cloud computing services invoiced or paid monthly. The Company provides services to its customers under pay-as-you-go contracts and term-based contracts ranging in duration from one month to 48 months. Customers that pay via credit card are either billed in advance or as they use service. Larger customers are billed in arrears via invoices for services used. Certain customers have contracts that provide for a minimum monthly commitment and some customers have contracts that provide for a commitment that may be of a quarterly, annual or other specific durations. 94 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) The Company recognizes revenue from these transactions when all of the following criteria are satisfied: • there is persuasive evidence of an arrangement; • the service has been or is being provided to the customer; • the amount of the fees to be paid by the customer is fixed or determinable; and • collectability of the fees is reasonably assured. Term-based contracts revenue is recognized on a straight-line basis over the contractual term of the arrangement beginning on the date that the service is made available to the customer, provided that all other revenue recognition criteria have been met. Usage-based fees are recognized as delivered. The Company’s arrangements do not contain general rights of return. However, credits may be issued to customers on a case-by-case basis. The contracts do not provide customers with the right to take possession of the software supporting the applications. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue, depending on whether the revenue recognition criteria have been met. The reserve for sales credits was $1.8 million and $0.5 million as of December 31, 2017 and 2016, respectively, and is included in accounts receivable, net in the accompanying consolidated balance sheets. The reserve for sales credits is calculated based on historical trends and any specific risks identified in processing transactions. Changes in the reserve are recorded against revenue. The Company collects various taxes and fees as an agent in connection with the sale of its services and remits these amounts to the respective taxing authorities. These taxes and fees have been presented on a net basis in the consolidated statements of operations and are recorded as a component of accrued liabilities in the accompanying consolidated balance sheets until remitted to the respective taxing authority. (f) Cost of Revenue Cost of revenue consists primarily of costs of communications services purchased from network service providers. Cost of revenue also includes fees to support the Company’s cloud infrastructure, personnel costs, such as salaries and stock-based compensation for the customer care and support services employees, and non-personnel costs, such as amortization of capitalized internal-use software development costs. (g) Research and Development Expenses Research and development expenses consist primarily of personnel costs, cloud infrastructure fees for staging and development, outsourced engineering services, amortization of capitalized internal-use software development costs and an allocation of general overhead expenses. The Company capitalizes the portion of its software development costs that meets the criteria for capitalization. (h) Internal-Use Software Development Costs Certain costs of platform and other software applications developed for internal use are capitalized. The Company capitalizes qualifying internal-use software development costs that are 95 F o r m 1 0 - K TWILIO INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) incurred during the application development stage. Capitalization of costs begins when two criteria are met: (i) the preliminary project stage is completed and (ii) it is probable that the software will be completed and used for its intended function. Capitalization ceases when the software is substantially complete and ready for its intended use, including the completion of all significant testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality and expenses costs incurred for maintenance and minor upgrades and enhancements. Costs related to preliminary project activities and post-implementation operating activities are also expensed as incurred. Capitalized costs of platform and other software applications are included in property and equipment. These costs are amortized over the estimated useful life of the software on a straight-line basis over three years. Management evaluates the useful life of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. The amortization of costs related to the platform applications is included in cost of revenue, while the amortization of costs related to other software applications developed for internal use is included in research and development expenses. (i) Advertising Costs Advertising costs are expensed as incurred and were $4.9 million, $3.5 million and $2.9 million in the years ended December 31, 2017, 2016 and 2015, respectively. Advertising costs are included in sales and marketing expenses in the accompanying consolidated statements of operations. (j) Stock-Based Compensation All stock-based compensation to employees, including the purchase rights issued under the Company’s 2016 Employee Stock Purchase Plan (the ‘‘ESPP’’), is measured on the grant date based on the fair value of the awards on the date of grant. This cost is recognized as an expense following the ratable attribution method, over the requisite service period, for stock options, and the straight-line attribution method, over the offering period, for the purchase rights issued under the ESPP. The Company uses the Black-Scholes option pricing model to measure the fair value of its stock options and the purchase rights issued under the ESPP. The fair value of the restricted stock units is determined using the fair value of the Company’s Class A common stock on the date of grant. Prior to adoption of ASU 2016-09, the stock-based compensation was recorded net of estimated forfeitures. In March 2016, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Update (‘‘ASU’’) No. 2016-09, ‘‘Compensation—Stock Compensation (Topic 718): Improvements to Employee Share -Based Payment Accounting.’’ This new guidance was intended to simplify several areas of accounting for stock-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company early adopted this guidance in the quarter ended December 31, 2016. The new guidance allows entities to account for forfeitures as they occur. The Company elected to account for forfeitures as they occur and adopted this provision on a modified retrospective basis. The $0.1 million of cumulative prior years’ impact as well as the impact on the first three quarters of 2016 of $75,000 was recognized as an increase to stock-based compensation during the quarter ended 96 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) December 31, 2016, as the impact on prior periods was insignificant. Adoption of all other changes in the new guidance did not have a significant impact on the Company’s consolidated financial statements. Prior to the IPO, the fair value of the Company’s common stock was determined by the estimated fair value of the Company’s common stock at the time of grant. After the IPO, the Company uses the market closing price of its Class A common stock as reported on the New York Stock Exchange for the fair value. Compensation expense for stock options granted to nonemployees is calculated using the Black- Scholes option pricing model and is recognized in expense over the service period. Compensation expense for nonemployee stock options subject to vesting is revalued at each reporting date until the stock options are vested. The Black-Scholes option pricing model requires the use of complex assumptions, which determine the fair value of stock-based awards. These assumptions include: • Fair value of the common stock. Prior to the Company’s IPO, the board of directors considered numerous objective and subjective factors to determine the fair value of the Company’s common stock at each meeting at which awards are approved. The factors included, but were not limited to: (i) contemporaneous valuations of the Company’s common stock by an unrelated third party; (ii) the prices at which the Company sold shares of its convertible preferred stock to outside investors in arms-length transactions; (iii) the rights, preferences and privileges of the Company’s convertible preferred stock relative to those of its common stock; (iv) the Company’s results of operations, financial position and capital resources; (v) current business conditions and projections; (vi) the lack of marketability of the Company’s common stock; (vii) the hiring of key personnel and the experience of management; (viii) the introduction of new products; (ix) the risk inherent in the development and expansion of the Company’s products; (x) the Company’s stage of development and material risks related to its business; (xi) the fact that the option grants involve illiquid securities in a private company; and (xii) the likelihood of achieving a liquidity event, such as an initial public offering or sale of the Company, in light of prevailing market conditions; • Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company uses the simplified calculation of expected term, as the Company does not have sufficient historical data to use any other method to estimate expected term; • Expected volatility. The expected volatility is derived from an average of the historical volatilities of the common stock of several entities with characteristics similar to those of the Company, such as the size and operational and economic similarities to the Company’s principal business operations; • 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 the expected term of the stock-based awards; and • Expected dividend. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock. 97 F o r m 1 0 - K TWILIO INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) If any of the assumptions used in the Black-Scholes model changes, stock-based compensation for future options may differ materially compared to that associated with previous grants. (k) Income Taxes The Company accounts for income taxes in accordance with authoritative guidance which requires the use of the asset and liability approach. Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carry-forwards. Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized. The Company recognizes the effect of uncertain income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to uncertain tax positions in the provision for income taxes in the consolidated statements of operations. (l) Foreign Currency Translation The functional currency of the Company’s foreign subsidiaries is generally the U.S. dollar. Accordingly, the subsidiaries remeasure monetary assets and liabilities at period-end exchange rates, while non-monetary items are remeasured at historical rates. Revenue and expense accounts are remeasured at the average exchange rate in effect during the year. Remeasurement adjustments are recognized in the consolidated statements of operations as other income or expense in the year of occurrence. Foreign currency transaction gains and losses were insignificant for all periods presented. For those entities where the functional currency is a foreign currency, adjustments resulting from translating the financial statements into U.S. dollars are recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Monetary assets and liabilities denominated in a foreign currency are translated into US dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at the weighted average exchange rates during the period. Equity transactions are translated using historical exchange rates. Foreign currency transaction gains and losses are included in other income (expense), net in the consolidated statements of operations. (m) Comprehensive Income (Loss) Comprehensive income (loss) refers to net income (loss) and other revenue, expenses, gains and losses that, under generally accepted accounting principles, are recorded as an element of stockholders’ equity but are excluded from the calculation of net income (loss). For the years ended December 31, 2016 and 2015, the Company’s operations did not give rise to any material items includable in comprehensive income (loss), which were not already in net income 98 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) (loss). Accordingly, for those periods, the Company’s comprehensive income (loss) is the same as its net income (loss). (n) Net Loss Per Share Attributable to Common Stockholders The Company calculates its basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for companies with participating securities. All series of convertible preferred stock are considered to be participating securities as the holders of the preferred stock are entitled to receive a non-cumulative dividend on a pro rata pari passu basis in the event that a dividend is declared or paid on common stock. Shares of common stock issued upon early exercise of stock options that are subject to repurchase are also considered to be participating securities, because holders of such shares have non-forfeitable dividend rights in the event a dividend is declared or paid on common stock. Under the two-class method, in periods when the Company has net income, net income attributable to common stockholders is determined by allocating undistributed earnings, calculated as net income less current period convertible preferred stock non-cumulative dividends, between common stock and the convertible preferred stock. In computing diluted net income attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. The Company’s basic net loss per share attributable to common stockholders 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 diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method. For purposes of this calculation, convertible preferred stock, options to purchase common stock, unvested restricted stock units, common stock issued subject to future vesting, any shares of stock committed under the ESPP, any shares of stock held in escrow and any shares of stock reserved for future donations are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is antidilutive. Since the Company’s IPO in 2016, Class A and Class B common stock are the only outstanding equity of the Company. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to 10 votes per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder on a one-for-one basis, and are automatically converted into Class A common stock upon sale or transfer, subject to certain limited exceptions. Shares of Class A common stock are not convertible. (o) Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist of funds deposited into money market funds. All credit and debit card transactions that process as of the last day of each month and settle within the first few days of the subsequent month are also classified as cash and cash equivalents as of the end of the month in which they were processed. 99 F o r m 1 0 - K TWILIO INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) (p) Restricted Cash Restricted cash consists of cash deposited into a savings account with a financial institution as collateral for the Company’s obligations under its facility leases of premises located in San Francisco, California. The facility lease for the Company’s old office space expired in January 2017 and the facility lease for the Company’s new office space expires in October 2024. The restricted cash balances as of December 31, 2017 and December 31, 2016 were $5.5 million and $8.6 million, respectively. (q) Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are recorded net of the allowance for doubtful accounts and the reserve for sales credits. The allowance for doubtful accounts is estimated based on the Company’s assessment of its ability to collect on customer accounts receivable. The Company regularly reviews the allowance by considering certain factors such as historical experience, credit quality, age of accounts receivable balances and other known conditions that may affect a customer’s ability to pay. In cases where the Company is aware of circumstances that may impair a specific customer’s ability to meet their financial obligations, a specific allowance is recorded against amounts due from the customer which reduces the net recognized receivable to the amount the Company reasonably believe will be collected. The Company writes-off accounts receivable against the allowance when a determination is made that the balance is uncollectible and collection of the receivable is no longer being actively pursued. The allowance for doubtful accounts was $1.0 million and $1.1 million as of December 31, 2017 and 2016, respectively. (r) Costs Related to the Public Offerings Costs related to the public offerings, which consist of direct incremental legal, printing and accounting fees, are deferred until the offering is completed. Upon completion of the offering, these costs are offset against the offering proceeds within the consolidated statements of stockholders’ equity. As of December 31, 2016, the Company recorded in its consolidated statement of stockholders’ equity $5.7 million in total offering costs, of which $4.9 million and $0.8 million related to the IPO and the FPO, respectively. (s) Property and Equipment Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful life of the related asset. Maintenance and repairs are charged to expenses as incurred. The useful lives of property and equipment are as follows: Capitalized software development costs . . . . . . . . . . . . . . . . . Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 years 3 years 5 years 3 years 5 years or remaining lease term 100 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) (t) Intangible Assets Intangible assets recorded by the Company are costs directly associated with securing legal registration of patents and trademarks, acquiring domain names and the fair value of identifiable intangible assets acquired in business combinations. Intangible assets with determinable economic lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful life of each asset on a straight-line basis. The Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors the Company considers when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, the Company’s long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset and other economic factors, including competition and specific market conditions. Intangible assets without determinable economic lives are carried at cost, not amortized and reviewed for impairment at least annually. The useful lives of the intangible assets are as follows: Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplier relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Domain names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 - 4 years 5 - 8 years 5 years 2 years 20 years Indefinite Indefinite (u) Goodwill Goodwill represents excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that it operates as one reporting unit and has selected November 30 as the date to perform its annual impairment test. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company’s business. If these estimates or their related assumptions change in the future, the Company may be required to record impairment for these assets. Management may first evaluate qualitative factors to assess if it is more likely than not that the fair value of a reporting unit is less than its carrying amount and to determine if a two-step impairment test is necessary. Management may choose to proceed directly to the two-step evaluation, bypassing the initial qualitative assessment. The first step of the impairment test involves comparing the fair value of the reporting unit to its net book value, including goodwill. If the net book value exceeds its fair value, then the Company would perform the second step of the goodwill impairment test to determine the amount of the impairment loss. The impairment loss would be calculated by comparing the implied fair value of the goodwill to its net book value. In calculating the implied fair value of goodwill, the fair value of the entity would be allocated to all of the other assets and liabilities based on their fair values. The excess of the fair value of the entity over the amount assigned to other assets and liabilities is the implied fair value of goodwill. An F o r m 1 0 - K 101 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. No goodwill impairment charges have been recorded for any period presented. (v) Impairment of Long-Lived Assets The Company evaluates long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If such evaluation indicates that the carrying amount of the asset or the asset group is not recoverable, any impairment loss would be equal to the amount the carrying value exceeds the fair value. There was no impairment during the years ended December 31, 2017, 2016 and 2015. The value of the internally-developed software written-off due to abandonment was $0.6 million, $0.7 million and $0.1 million in the years ended December 31, 2017, 2016 and 2015, respectively. (w) Deferred Revenue Deferred revenue consists of cash deposits from customers to be applied against future usage and customer billings in advance of revenues being recognized from the Company’s contracts. Deferred revenue is generally expected to be recognized during the succeeding 12-month period and is thus recorded as a current liability. Deferred revenue is refunded in cash upon termination of customer accounts. (x) Business Combinations The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill is measured as the excess of the consideration transferred over the fair value of assets acquired and liabilities assumed on the acquisition date. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed, these estimates are inherently uncertain and subject to refinement. The authoritative guidance allows a measurement period of up to one year from the date of acquisition to make adjustments to the preliminary allocation of the purchase price. As a result, during the measurement period the Company may record adjustments to the fair values of assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon conclusion of the measurement period or final determination of the values of the assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments will be recorded to the consolidated statement of operations. (y) Segment Information The Company’s Chief Executive Officer is the chief operating decision maker, who reviews the Company’s financial information presented on a consolidated basis for purposes of allocating resources and evaluating the Company’s financial performance. Accordingly, the Company has determined that it operates in a single reporting segment. 102 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) (z) Fair Value of Financial Instruments The Company applies fair value accounting for all financial instruments on a recurring basis. The Company’s financial instruments, which include cash, cash equivalents, accounts receivable and accounts payable are recorded at their carrying amounts, which approximate their fair values due to their short-term nature. Restricted cash is long-term in nature and consists of cash in a savings account, hence its carrying amount approximates its fair value. Marketable securities consist of U.S. treasury securities and high credit quality corporate debt securities. All marketable securities are considered to be available-for-sale and recorded at their estimated fair values. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive income (loss). In valuing these items, the Company uses inputs and assumptions that market participants would use to determine their fair value, utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Impairments are considered to be other than temporary if they are related to deterioration in credit risk or if it is likely that the security will be sold before the recovery of its cost basis. Realized gains and losses and declines in value deemed to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows: • Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. • Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. • Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. (aa) Recent Accounting Pronouncements Not Yet Adopted In May 2017, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Updates (‘‘ASU’’) 2017-09, ‘‘Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting’’, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance is effective prospectively for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. The Company will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial position, results of operations or cash flows. 103 F o r m 1 0 - K TWILIO INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) In January 2017, the FASB issued ASU 2017-04, ‘‘Simplifying the Test for Goodwill Impairment’’, which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2019. The Company will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial position, results of operations or cash flows. In January 2017, the FASB issued ASU 2017-01, ‘‘Business Combinations (Topic 805) Clarifying the Definition of a Business’’, which amends the guidance of FASB Accounting Standards Codification Topic 805, ‘‘Business Combinations’’, adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted under certain circumstances. The Company will adopt this guidance upon its effective date and implement it next time there is a potential business combination. In November 2016, the FASB issued ASU 2016-18, ‘‘Restricted Cash’’, which requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company will adopt this guidance upon its effective date and its impact will be a function of the amounts of restricted cash the Company has at that time and the movements therein. In October 2016, the FASB issued ASU 2016-16, ‘‘Intra-Entity Transfers Other Than Inventory’’, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have any material impact on the Company’s financial position, results of operations or cash flows. In June 2016, the FASB issued ASU No. 2016-13, ‘‘Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments’’, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is evaluating the impact of this guidance on its consolidated financial statements and related disclosures. In February 2016, the FASB issued ASU No. 2016-02, ‘‘Leases.’’ The standard will affect all entities that lease assets and will require lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of less than one year) as of the date on which the lessor makes the underlying asset available to the lessee. For lessors, accounting for leases is substantially the same as in prior periods. For public companies, the new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early 104 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) adoption is permitted. For leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition approach. While the Company expects the adoption of this standard to result in an increase to the reported assets and liabilities, the Company has not yet determined the full impact that the adoption of this standard will have on its consolidated financial statements and related disclosures. In May 2014, the FASB issued ASU 2014-09, ‘‘Revenue from Contracts with Customers’’. This new guidance will replace most existing U.S. GAAP guidance on this topic. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 which deferred, by one year, the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP. In accordance with the deferral, this guidance will be effective for the Company beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted beginning January 1, 2017. In March 2016, the FASB issued ASU 2016-08, ‘‘Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)’’ clarifying the implementation guidance on principal versus agent considerations. Specifically, an entity is required to determine whether the nature of a promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). The determination influences the timing and amount of revenue recognition. In April 2016, the FASB issued ASU 2016-10, ‘‘Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing’’, clarifying the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments reduce the cost and complexity of identifying promised goods or services and improve the guidance for determining whether promises are separately identifiable. The amendments also provide implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). In May 2016, the FASB issued ASU 2016-12 ‘‘Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients’’, which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. In September 2017, the FASB issued ASU 2017-13, ‘‘Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)’’. These amendments provide additional clarification and implementation guidance on the previously issued ASUs. These amendments do not change the core principles of the guidance stated in ASU 2014-09, instead they are intended to clarify and improve operability of certain topics included within the revenue standard. In November 2017, the FASB issued ASU 2017-14, which includes amendments to certain SEC paragraphs within the FASB Accounting Standards Codification (Codification). ASU 2017-14 amends the Codification to incorporate SEC Staff Accounting Bulletin (SAB) No. 116 and SEC Interpretive Release on Vaccines for Federal Government Stockpiles (SEC 105 F o r m 1 0 - K TWILIO INC. Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Release No. 33-10403) that bring existing SEC staff guidance into conformity with the FASB’s adoption of and amendments to ASC Topic 606, Revenue from Contracts with Customers. The effective date and transition requirements for ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2017-13 and ASU 2017-14 are the same as the effective date and transition requirements for ASU 2014-09. The Company has evaluated the potential changes from the adoption of the new standard on its financial statements and disclosures, and is in the process of implementing appropriate changes to its business processes, systems and controls to support revenue recognition and disclosures under the new standard. Based on this evaluation, the Company will adopt the requirements of the new standard in the first quarter of 2018, using the modified retrospective transition method with a cumulative catch adjustment to retained earnings as of January 1, 2018. Under the new standard, based on the Company’s preliminary assessment, the Company does not believe there will be material changes to its revenue recognition and the expectation is that the majority of the Company’s revenue will continue to be recognized according to the usage by its customers, in the period in which that usage occurs. The Company is also assessing the impact of adoption of the new standard on its accounting for sales commissions. The Company’s current accounting policy requires capitalization and amortization of the deferred commissions. Under the new standard, the amounts capitalized will be recognized as amortization over the expected customer life. The Company’s preliminary assessment of its analyses of the amortizable life of the deferred commissions under the new guidance at three years. Further review of certain commission plans is yet to be completed to finalize the impact on the consolidated statements of financial position, results of operations and cash flows. There will not be any significant tax impact to the Company’s consolidated statements of operations and consolidated balance sheet relating to the adoption of the new standard as there will be a full valuation allowance due to the Company’s history of continued losses. 3. Fair Value Measurements The following tables provide the assets measured at fair value on a recurring basis as of December 31, 2017 and 2016 (in thousands): Amortized Cost or Carrying Value Net Unrealized Losses Fair Value Hierarchy as of December 31, 2017 Level 1 Level 2 Level 3 Aggregate Fair Value Financial Assets: Cash and cash equivalents: Money market funds . . . . . . . . . . . . $ 95,432 $ — $ 95,432 $ — $— $ 95,432 Total included in cash and cash equivalents . . . . . . . . . . . . . . . 95,432 — 95,432 — Marketable securities: U.S. Treasury securities . . . . . . . . Corporate debt securities . . . . . . . 59,962 116,223 Total marketable securities . . . . . . 176,185 (216) (382) (598) 59,746 — — 115,841 59,746 115,841 — — — — 95,432 59,746 115,841 175,587 Total financial assets . . . . . . . . . . . . $271,617 $(598) $155,178 $115,841 $— $271,019 106 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 3. Fair Value Measurements (Continued) There were no marketable securities as of December 31, 2016. Total Carrying Value As of December 31, 2016 Level I Level 2 Level 3 Total Financial Assets: Money market funds (included in cash and cash equivalents) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $274,135 $274,135 Total financial assets . . . . . . . . . . . . . . . . . . . . . . $274,135 $274,135 $— $— $— $274,135 $— $274,135 As the Company views these securities as available to support current operations, it has classified all available-for-sale securities as short term. The following table summarizes the contractual maturities of marketable securities as of December 31, 2017 (in thousands): Financial Assets: Less than one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One to two years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $108,584 67,601 $108,360 67,227 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $176,185 $175,587 Amortized Cost Aggregate Fair Value For fixed income securities that had unrealized losses as of December 31, 2017, the Company has determined that no other-than-temporary impairment existed. As of December 31, 2017, all securities in an unrealized loss position have been in an unrealized loss position for less than one year. Interest earned on marketable securities in the year ended December 31, 2017 was $2.6 million and is recorded as other income (expense), net, in the accompanying consolidated statement of operations. 4. Property and Equipment Property and equipment consisted of the following (in thousands): As of December 31, 2017 2016 Capitalized internal-use software development costs . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,177 14,246 9,652 1,976 1,675 $ 28,661 14,063 5,729 1,576 968 Total property and equipment . . . . . . . . . . . . . . . . . . . . . . . Less: accumulated depreciation and amortization . . . . . . . . . . . 76,726 (26,185) 50,997 (13,445) Total property and equipment, net . . . . . . . . . . . . . . . . . . . . $ 50,541 $ 37,552 Depreciation and amortization expense was $13.1 million, $7.4 million and $3.7 million for the years ended December 31, 2017, 2016 and 2015, respectively. 107 F o r m 1 0 - K TWILIO INC. Notes to Consolidated Financial Statements (Continued) 4. Property and Equipment (Continued) The Company capitalized $21.5 million, $13.5 million and $9.4 million in internal-use software development costs in the years ended December 31, 2017, 2016 and 2015, respectively, of which $4.2 million, $2.0 million and $1.0 million, respectively, was stock-based compensation expense. Amortization of capitalized software development costs was $8.4 million, $5.5 million and $2.8 million in the years ended December 31, 2017, 2016 and 2015, respectively. The amortization expense was allocated as follows (in thousands): Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . $4,788 3,619 $3,304 2,182 $1,793 1,045 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,407 $5,486 $2,838 Year Ended December 31, 2017 2016 2015 5. Business Combinations Beepsend, AB In February 2017, the Company completed its acquisition of Beepsend AB, a messaging provider based in Sweden, specializing in messaging and SMS solutions, for a total purchase price of $23.0 million, paid in cash, of which $5.0 million was held in escrow. The escrow will continue for 18 months after the transaction closing date and may be extended under certain circumstances. Additionally, the Company deposited $2.0 million into a separate escrow account that will be released to certain employees on the first and second anniversaries of the closing date, provided the underlying service conditions are met. This amount is recorded as prepaid compensation in the accompanying consolidated balance sheet and is amortized into expense as the services are rendered. The acquisition was accounted for as a business combination and, accordingly, the total purchase price was allocated to the preliminary net tangible and intangible assets and liabilities based on their preliminary fair values on the acquisition date. The prepaid compensation subject to service conditions is accounted for as a post-acquisition compensation expense and recorded as research and development expense in the accompanying consolidated statement of operations. During the measurement period in 2017, the Company recorded a net adjustments of $0.1 million to the preliminary purchase price allocation. As of December 31, 2017 the purchase price allocation is final. The acquired entity’s results of operations have been included in the consolidated financial statements of the Company from the date of acquisition. 108 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 5. Business Combinations (Continued) The following table presents the purchase price allocation, as adjusted, recorded in the Company’s consolidated balance sheet (in thousands): Net tangible liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total $ (3,575) 12,837 13,700 Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,962 (1) Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed. The goodwill in this transaction is primarily attributable to the future cash flows to be realized from the acquired technology platform, existing customer and supplier relationships as well as operational synergies. Goodwill is deductible for tax purposes. (2) Identifiable finite-lived intangible assets were comprised of the following: Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplier relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated life (in years) 4 7 - 8 5 Total $ 5,000 6,100 2,600 Total intangible assets acquired . . . . . . . . . . . . . . . . . . . . . . . . $13,700 The Company acquired a net deferred tax liability of $2.6 million in this business combination that is included in the long-term liabilities in the accompanying consolidated balance sheet. The estimated fair value of the intangible assets acquired was determined by the Company, and the Company considered or relied in part upon a valuation report of a third-party expert. The Company used income approaches to estimate the fair values of the identifiable intangible assets. Specifically, the developed technology asset class was valued using the-relief-from royalty method, while the customer relationships asset class was valued using a multi-period excess earnings method and the supplier relationships asset class was valued using an incremental cash flow method. F o r m 1 0 - K The Company incurred costs related to this acquisition of $0.7 million, of which $0.3 million and $0.4 million were incurred during fiscal years 2017 and 2016, respectively. All acquisition related costs were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statements of operations. Pro forma results of operations for this acquisition are not presented as the financial impact to the Company’s consolidated financial statements is immaterial. Kurento Open Source Project In November 2016, the Company acquired certain assets from Tikal Technologies S.L., a Spanish corporation, behind the Kurento Open Source Project. The acquired assets consisted of (a) proprietary 109 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 5. Business Combinations (Continued) WebRTC media processing technologies, (b) certain licenses, patents and trademarks and (c) certain employee relationships behind the WebRTC technology. The purchase price consisted of $8.5 million in cash, of which $1.5 million was placed into escrow to indemnify the Company against breaches of general representations, warranties, claims and tax compliance matters. The escrow is effective for 24 months and 10 days from the acquisition date and may be extended under certain circumstances. The acquisition was accounted for as a business combination and, accordingly, the total purchase price was allocated to the identifiable intangibles assets acquired based on their respective fair values on the acquisition date. The excess of the purchase price over the fair values of the identifiable assets acquired was recorded as goodwill. The Company considered or relied in part upon a valuation report of a third-party expert. The following table presents the final purchase price allocation recorded in the Company’s consolidated balance sheet (in thousands): Intangible assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total $8,100 400 Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,500 (1) The intangible assets consist of developed technology with the estimated useful life of 3 years on the date of acquisition. (2) The goodwill in this transaction is primarily attributable to the future cash flows to be realized from the acquired technology and the future development initiatives of the acquired workforce. The goodwill is deductible for tax purposes. The Company incurred cost related to this acquisition of $0.1 million that were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statement of operations. Authy, Inc. In February 2015, the Company completed its acquisition of Authy, Inc. (‘‘Authy’’), a Delaware corporation with operations in Bogota, Colombia and San Francisco, California. Authy had developed a two-factor authentication online security solution. The Company’s purchase price of $6.1 million for all of the outstanding shares of capital stock of Authy consisted of $3.0 million in cash and $3.1 million representing the fair value of 389,733 shares of the Company’s Series T convertible preferred stock, of which 180,000 shares were placed in escrow. The escrow was effective until the first anniversary of the closing date, and has continued beyond that date as a result of certain circumstances. As of December 31, 2017, the Company has not released any shares out of the escrow. Additionally, the Company issued 507,885 shares of its Series T convertible preferred stock, which converted into shares of Class B common stock immediately prior to the closing of the IPO, to a former shareholder of Authy that had a fair value of $4.0 million and were subject to a service condition over a period of three years, as amended. In August 2016, the unvested shares were reduced by 127,054 shares due to the non-fulfillment of certain conditions of the merger agreement. In December 2016, all remaining unvested shares vested. 110 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 5. Business Combinations (Continued) The acquisition was accounted for as a business combination and, accordingly, the total purchase price was allocated to the identifiable tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date. The cost of shares subject to vesting and performance conditions was accounted for as a post-acquisition compensation expense and recorded as research and development expense in the accompanying consolidated statements of operations. The Company recorded $2.4 million and $0.6 million of stock-based compensation expense related to these shares in the years ended December 31, 2016 and 2015, respectively. Authy’s results of operations have been included in the consolidated financial statements of the Company from the date of acquisition. This transaction was intended to qualify as a tax-free reorganization under Section 368(a) of the IRS Code. The fair value of the Series T convertible preferred stock was determined by the board of directors of the Company with input from a third-party valuation consultant. The following table presents the final purchase price allocation recorded in the Company’s consolidated balance sheet (in thousands): Net tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total $1,165 3,165 1,760 Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,090 The Company acquired a net deferred tax liability of $0.1 million in this business combination. (1) Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed. The goodwill in this transaction is primarily attributable to the future cash flows to be realized from the acquired technology platform, existing customer base and the future development initiatives of the assembled workforce. Goodwill is not deductible for tax purposes. (2) Identifiable finite-lived intangible assets were comprised of the following: Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated life (in years) 3 5 2 Total $1,300 400 60 Total intangible assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . $1,760 The estimated fair value of the intangible assets acquired was determined by the Company, and the Company considered or relied in part upon a valuation report of a third-party expert. The Company used an income approach to measure the fair values of the developed technology and trade names based on the relief-from-royalty method. The Company used an income approach to measure 111 F o r m 1 0 - K TWILIO INC. Notes to Consolidated Financial Statements (Continued) 5. Business Combinations (Continued) the fair value of the customer relationships based on the multi-period excess earnings method, whereby the fair value is estimated based upon the present value of cash flows that the applicable asset is expected to generate. The Company incurred costs related to this acquisition of $1.5 million, of which $1.2 million and $0.3 million were incurred during the years ended December 31, 2015 and 2014, respectively. All acquisition related costs were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statements of operations. Pro forma results of operations for this acquisition are not presented as the financial impact to the Company’s consolidated financial statements is immaterial. 6. Goodwill and Intangible Assets Goodwill Goodwill balance as of December 31, 2017 and 2016 was as follows (in thousands): Balance as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill recorded in connection with 2016 acquisition . . . . . . . . . . . . . . $ 3,165 400 Balance as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill recorded in connection with 2017 acquisition . . . . . . . . . . . . . . Measurement period adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,565 12,688 149 1,449 Balance as of December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,851 Total Intangible assets Intangible assets consisted of the following (in thousands): As of December 31, 2017 Gross Accumulated Amortization Net Amortizable intangible assets: Developed technology . . . . . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . . Supplier relationships . . . . . . . . . . . . . . . . . . . . . Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,941 7,159 2,881 60 1,878 $(5,476) (1,006) (500) (60) (108) $ 9,465 6,153 2,381 — 1,770 Total amortizable intangible assets . . . . . . . . . . 26,919 (7,150) 19,769 Non-amortizable intangible assets: Domain names . . . . . . . . . . . . . . . . . . . . . . . . . Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 263 — — 32 263 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,214 $(7,150) $20,064 112 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 6. Goodwill and Intangible Assets (Continued) As of December 31, 2016 Gross Accumulated Amortization Net Amortizable intangible assets: Developed technology . . . . . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . . Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,400 400 60 1,512 Total amortizable intangible assets . . . . . . . . . . 11,372 $(1,140) (148) (56) (55) (1,399) $ 8,260 252 4 1,457 9,973 Non-amortizable intangible assets: Domain names . . . . . . . . . . . . . . . . . . . . . . . . . Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 263 — — 32 263 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,667 $(1,399) $10,268 Amortization expense was $5.7 million, $0.9 million and $0.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. Total estimated future amortization expense was as follows (in thousands): 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2017 $ 6,793 5,083 2,653 1,520 924 2,796 $19,769 7. Accrued Expenses and Other Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): As of December 31, 2017 2016 Accrued payroll and related . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued bonus and commission . . . . . . . . . . . . . . . . . . . . . . . . . Accrued cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and other taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . ESPP contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,898 4,777 10,876 20,877 1,338 1,048 9,800 $ 3,132 2,251 8,741 28,795 4,365 1,250 10,774 Total accrued expenses and other current liabilities . . . . . . . . . $53,614 $59,308 113 F o r m 1 0 - K TWILIO INC. Notes to Consolidated Financial Statements (Continued) 7. Accrued Expenses and Other Liabilities (Continued) Long-term liabilities consisted of the following (in thousands): Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,480 2,452 477 $9,387 (2) 158 Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,409 $9,543 As of December 31, 2017 2016 8. Supplemental Balance Sheet Information A roll-forward of the Company’s reserves for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands): (a) Allowance for doubtful accounts: Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,076 580 (623) $ 486 1,145 (555) $ 210 705 (429) Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . $1,033 $1,076 $ 486 Year Ended December 31, 2017 2016 2015 (b) Sales credit reserve: Balance, beginning of period . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deductions against reserve . . . . . . . . . . . . . . . . . . . . . . $ 544 2,531 (1,314) $ 714 1,348 (1,518) $ 312 1,210 (808) Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . $ 1,761 $ 544 $ 714 Year Ended December 31, 2017 2016 2015 114 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 9. Revenue by Geographic Area Revenue by geographic area is based on the IP address at the time of registration. The following table sets forth revenue by geographic area (in thousands): Year Ended December 31, 2017 2016 2015 Revenue by geographic area: United States . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . . $308,612 90,408 $233,922 43,413 $143,145 23,774 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $399,020 $277,335 $166,919 Percentage of revenue by geographic area: United States . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . . 77% 23% 84% 16% 86% 14% Long-lived assets outside the United States were not significant. 10. Commitments and Contingencies (a) Lease Commitments The Company entered into various non-cancelable operating lease agreements for its facilities that expire over the next six years. Certain operating leases contain provisions under which monthly rent escalates over time. When lease agreements contain escalating rent clauses or free rent periods, the Company recognizes rent expense on a straight-line basis over the term of the lease. In January 2016, the Company entered into a lease agreement (‘‘Lease’’), as subsequently amended, for approximately 90,000 square feet of new office space at 375 Beale Street in San Francisco, California, that houses its principal executive office. The term of the Lease is approximately 96 months following the commencement in October 2016, and the lease payments range from $0.4 million per month in the first 60 months to $0.5 million per month thereafter. The Lease included a tenant improvement allowance to cover construction of certain leasehold improvements for up to $8.3 million. All applicable amounts were collected from the landlord as of December 31, 2017. Based on the terms of the landlord incentive and involvement of the Company in the construction process, the leasehold improvements were determined to be property of the Company. The Company secured its lease obligation with a $7.4 million letter of credit, which was designated as restricted cash on its balance sheet as of December 31, 2016. As of December 31, 2017, the letter of credit and the restricted cash were reduced to $5.5 million, as stipulated in the lease agreement. Rent expense was $8.1 million, $7.3 million and $4.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. F o r m 1 0 - K 115 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 10. Commitments and Contingencies (Continued) Future minimum lease payments under non-cancelable operating leases were as follows (in thousands): Year Ending December 31: 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2017 $ 7,884 7,676 7,101 7,033 5,864 10,189 Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,747 Additionally, the Company has noncancellable contractual commitments with its cloud infrastructure provider, network service providers and other vendors that are non-cancellable and expire within one to four years. Future minimum payments under these noncancellable purchase commitments were as follows (in thousands). Unrecognized tax benefits are not included in these amounts because any amounts expected to be settled in cash are not material: Year Ending December 31: As of December 31, 2017 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,414 25,526 147 23 Total payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $48,110 (b) Legal Matters On April 30, 2015, Telesign Corporation, or Telesign, filed a lawsuit against the Company in the United States District Court, Central District of California (‘‘Telesign I’’). Telesign alleges that the Company is infringing three U.S. patents that it holds: U.S. Patent No. 8,462,920 (‘‘‘920’’), U.S. Patent No. 8,687,038 (‘‘‘038’’) and U.S. Patent No. 7,945,034 (‘‘‘034’’). The patent infringement allegations in the lawsuit relate to the Company’s Account Security products, its two-factor authentication use case and an API tool to find information about a phone number. The Company petitioned the U.S. Patent and Trademark Office (‘‘U.S. PTO’’) for inter partes review of the patents at issue. On July 8, 2016, PTO denied the Company’s petition for inter partes review of the ‘920 and ‘038 patents, and on June 26, 2017, it upheld the patentability of the ‘034 patent, adopting Telesign’s narrow construction of its patent. On March 28, 2016, Telesign filed a second lawsuit against the Company in the United States District Court, Central District of California (‘‘Telesign II’’), alleging infringement of U.S. Patent No. 9,300,792 (‘‘‘792’’) held by Telesign. The ‘792 patent is in the same patent family as the ‘920 and ‘038 patents asserted in Telesign I. On March 8, 2017, in response to a petition by the Company, the 116 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 10. Commitments and Contingencies (Continued) PTO issued an order instituting the inter partes review for the ‘792 patent. A final written decision is expected by March 2018. On March 15, 2017, Twilio filed a motion to consolidate and stay related cases pending the conclusion of the ‘792 patent inter partes review, which the court granted. With respect to each of the patents asserted in Telesign I and Telesign II, the complaints seek, among other things, to enjoin the Company from allegedly infringing the patents, along with damages for lost profits. On December 1, 2016, the Company filed a patent infringement lawsuit against Telesign in the United States District Court, Northern District of California, alleging indirect infringement of United States Patent No. 8,306,021, United States Patent No. 8,837,465, United States Patent No. 8,755,376, United States Patent No. 8,736,051, United States Patent No. 8,737,962, United States Patent No. 9,270,833, and United States Patent No. 9,226,217. Telesign filed a motion to dismiss the complaint on January 25, 2017. In two orders, issued on March 31, 2017 and April 17, 2017, the Court granted Telesign’s motion to dismiss with respect to the ‘962, ‘833, ‘051 and ‘217 patents, but denied Telesign’s motion to dismiss as to the ‘021, ‘465 and ‘376 patents. This litigation is currently ongoing. On February 18, 2016, a putative class action complaint was filed in the Alameda County Superior Court in California, entitled Angela Flowers v. Twilio Inc. The complaint alleges that the Company’s products permit the interception, recording and disclosure of communications at a customer’s request and are in violation of the California Invasion of Privacy Act. The complaint seeks injunctive relief as well as monetary damages. On May 27, 2016, the Company filed a demurrer to the complaint. On August 2, 2016, the court issued an order denying the demurrer in part and granted it in part, with leave to amend by August 18, 2016 to address any claims under California’s Unfair Competition Law. The plaintiff opted not to amend the complaint. Following a period of discovery, the plaintiff filed a motion for class certification on September 20, 2017. On January 2, 2018, the court issued an order granting in part and denying in part the plaintiff’s class certification motion. The court certified two classes of individuals who, during specified time periods, allegedly sent or received certain communications involving the accounts of three of the Company’s customers that were recorded. The court has not yet set a schedule for notice to potential class members, additional discovery, summary judgment motions, or trial. The Company intends to vigorously defend itself against these lawsuits and believes it has meritorious defenses to each matter in which it is a defendant. It is too early in these matters to reasonably predict the probability of the outcomes or to estimate ranges of possible losses. In addition to the litigation matters discussed above, from time to time, the Company is a party to legal action and subject to claims that arise in the ordinary course of business. The claims are investigated as they arise and loss estimates are accrued, when probable and reasonably estimable. While it is not feasible to predict or determine the ultimate outcome of these matters, the Company believes that these legal proceedings will not have a material adverse effect on its financial position or results of operations. Legal fees and other costs related to litigation and other legal proceedings are expensed as incurred and are included in general and administrative expenses in the accompanying consolidated statements of operations. F o r m 1 0 - K 117 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 10. Commitments and Contingencies (Continued) (c) Indemnification Agreements The Company has signed indemnification agreements with all of its board members and executive officers. The agreements indemnify the board members and executive officers from claims and expenses on actions brought against the individuals separately or jointly with the Company for certain indemnifiable events. Indemnifiable Events generally mean any event or occurrence related to the fact that the board member or the executive officer was or is acting in his or her capacity as a board member or an executive officer for the Company or was or is acting or representing the interests of the Company. In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties and other liabilities relating to or arising from the Company’s various products, or its acts or omissions. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments. The terms of such obligations may vary. As of December 31, 2017 and 2016, no amounts were accrued. (d) Other Taxes The Company conducts operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income-based taxes, such as sales and use and telecommunications taxes are assessed on the Company’s operations. Prior to March 2017, the Company had not billed nor collected these taxes from its customers and, in accordance with U.S. GAAP, recorded a provision for its tax exposure in these jurisdictions when it was both probable that a liability had been incurred and the amount of the exposure could be reasonably estimated. These estimates included several key assumptions including, but not limited to, the taxability of the Company’s services, the jurisdictions in which its management believes it has nexus, and the sourcing of revenues to those jurisdictions. Starting in March 2017, the Company began collecting these taxes from customers in certain jurisdictions, and since then, has expanded the number of jurisdictions where these taxes are being collected. The Company expects to continue to expand the number of jurisdictions where these taxes will be collected in the future. Simultaneously, the Company was and continues to be in discussions with certain states regarding its prior state sales and other taxes, if any, that the Company may owe. During 2017, the Company revised its estimates of its tax exposure based on settlements reached with various states indicating that certain revisions to the key assumptions including, but not limited to, the sourcing of revenue and the taxability of the Company’s services were appropriate in the current period. In the year ended December 31, 2017, the total impact of these changes on the net loss attributable to common stockholders was a reduction of $13.4 million. As of December 31, 2017 and 2016, the liability recorded for these taxes was $20.9 million and $28.8 million, respectively. In the event other jurisdictions challenge management’s assumptions and analysis, the actual exposure could differ materially from the current estimates. 118 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 11. Stockholders’ Equity (a) Convertible Preferred Stock As of December 31, 2015, the Company had outstanding Series A, B, C, D, E and T convertible preferred stock (individually referred to as ‘‘Series A, B, C, D, E or T’’ or collectively ‘‘Preferred Stock’’) as follows (in thousands, except share data). Immediately prior to the completion of the IPO, all shares of convertible preferred stock then outstanding were automatically converted into 54,508,441 shares of common stock on a one-to-one basis, and then reclassified as shares of Class B common stock. Series A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2015 Shares Issued and Outstanding Aggregate Liquidation preference Proceeds, Net of Issuance Costs 13,076,491 11,146,895 8,452,864 9,440,324 11,494,249 897,618(1) $ 4,590 11,717 25,250 70,000 130,000 9 $ 4,592 11,658 25,196 69,930 125,448 —(2) Shares Authorized 13,173,240 11,416,062 8,452,864 9,440,324 11,494,249 5,000,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,976,739 54,508,441 $241,566 $236,824 (1) The outstanding shares include 687,885 shares held in escrow as of December 31, 2015 related to the Authy acquisition. Of these shares, 507,885 shares were subject to graded vesting over a period of three years, as amended, and had a fair value of $4.0 million. A total of 127,054 shares were subject to certain performance conditions and were returned to the issuer in the third quarter 2016 due to the non-fulfillment of certain conditions of the merger agreement. All remaining unvested shares vested in the fourth quarter of 2016. (2) 389,733 shares were issued as part of the purchase price for Authy acquisition and had a fair value of $3.1 million on the acquisition closing date. The holders of the Company’s Preferred Stock had the following rights, preferences and privileges: Conversion At any time following the date of issuance, each share of Preferred Stock is convertible, at the option of its holder, into the number of shares of common stock which results from dividing the applicable original issue price per share for each series by the applicable conversion price per share for such series, on the date of conversion. As of December 31, 2015, the initial conversion prices per share of all series of preferred stock were equal to the original issue prices of each series and therefore the conversion ratio was 1:1. Each share of preferred stock shall be automatically converted into shares of common stock immediately upon the earlier of (i) the consummation of a firmly underwritten public offering pursuant to the Securities Act of 1933, as amended, the public offering price of which is not less than $50.0 million in aggregate; or (ii) the date specified by the written consent of holders of a majority of the outstanding shares of preferred stock, voting together as a class of shares on an as-converted basis. In addition, the conversion of each of the Series B, Series C, Series D and Series E preferred stock in 119 F o r m 1 0 - K TWILIO INC. Notes to Consolidated Financial Statements (Continued) 11. Stockholders’ Equity (Continued) connection with a Liquidation Event defined below requires the written consent of a majority of such series, if the proceeds payable to each of these series is less than the respective original issuance price. A Liquidation Event includes (i) a sale, lease or other disposition of all or substantially all of the Company’s assets, (ii) a merger or consolidation of the Company into another entity (except where the merger results in the holders of the Company’s stock prior to merger continuing to hold at least 50% of the voting power of the capital stock of the Company or the surviving or acquiring entity), (iii) the transfer of the Company’s securities to a person, or a group of affiliated persons, if, after such a transfer, such person or group of persons holds 50% or more of the outstanding voting stock of the Company, (iv) the grant of an exclusive, irrecoverable license to all or substantially all of the Company’s intellectual property or (v) a liquidation, dissolution or winding up of the Company. In the event the Company issues any additional stock, as defined in the Company’s Certificate of Incorporation, after the preferred stock original issue date, without consideration or for a consideration per share less than the conversion price applicable to a series of preferred stock in effect immediately prior to such issuance, the conversion price for such series in effect immediately prior to each such issuance shall be adjusted according to a formula set forth in the Company’s Certificate of Incorporation. Voting The holders of Preferred Stock and the holders of common stock vote together and not as separate classes, except in cases specifically provided for in the Certificate of Incorporation or as provided by law. The holders of each share of Preferred Stock has the right to one vote for each share of common stock into which such Preferred Stock could be converted, and, with respect to such vote, holders of Preferred Stock have full voting rights and powers equal to the voting rights and powers of the holders of common stock, with the exception of voting for the election of directors referred to below. As long as a majority of the shares of Series A preferred stock originally issued remain outstanding, the holders of such shares, voting as a separate class, shall be entitled to elect one director. As long as a majority of the shares of Series B preferred stock originally issued remain outstanding, the holders of such shares, voting as a separate class, shall be entitled to elect one director. As long as at least 2,000,000 shares of Series D preferred stock are outstanding, the holders of such shares, voting as a separate class, shall be entitled to elect one director. The holders of common stock, voting as a separate class, shall be entitled to elect two directors. The holders of shares of Preferred Stock and common stock, voting together as a single class on an as-converted basis, shall be entitled to elect the remaining directors of the Company. Dividends The holders of convertible preferred stock are entitled to receive, when and if declared by the board of directors, out of any assets legally available therefor, any dividends as may be declared from time to time by the board of directors. No dividend may be declared or paid on the common stock unless any and all such dividends are distributed among all holders of common stock and preferred stock on a pro rata pari passu basis in proportion to the number of shares of common stock that would be held by each such holder if all shares of preferred stock were converted to common stock at the 120 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 11. Stockholders’ Equity (Continued) effective conversion rate. The right to receive dividends on shares of preferred stock is non-cumulative. No dividends had been declared or paid by the Company as of December 31, 2015 and through the Company’s IPO. Liquidation Preference In the event of any Liquidation Event of the Company, the holders of Series A, Series B, Series C, Series D and Series E preferred stock (‘‘senior preferred stock’’) shall be entitled to receive, in preference to any distribution of the proceeds to the holders of Series T preferred stock or common stock, an amount per share equal to the sum of the applicable original issue price for each series of preferred stock (as adjusted for stock splits and combinations as described in the Certificate of Incorporation), plus declared but unpaid dividends on such share. Upon completion of this distribution, the holders of Series T preferred stock shall be entitled to receive in preference to any distribution of the proceeds to the holders of common stock an amount per share equal to the sum of the applicable original issue price for Series T preferred stock, plus declared but unpaid dividends on such share. If the proceeds thus distributed among the holders of the preferred stock are insufficient to permit payment to such holders of the full preferential amounts, then the entire proceeds available for distribution shall be distributed ratably first among the holders of the senior preferred stock in proportion to the full preferential amount that each holder is otherwise entitled to. The original issue price per share of Series A, Series B, Series C, Series D, Series E and Series T convertible preferred stock is equal to $0.35, $1.05, $2.99, $7.42, $11.31 and $0.01, respectively. Upon completion of the distribution referred to above, all the remaining proceeds available for distribution shall be distributed to the holders of the Company’s common stock pro rata based on the number of common stock held by each. The Company classified the Preferred Stock within shareholders’ equity since the shares are not redeemable, and the holders of the Preferred Stock cannot effect a deemed liquidation of the Company outside of the Company control. (b) Preferred Stock As of December 31, 2017 and 2016, the Company had authorized 100,000,000 shares of preferred stock, par value $0.001, of which no shares were issued and outstanding. (c) Common Stock As of December 31, 2017 and 2016, the Company had authorized 1,000,000,000 shares of Class A common stock and 100,000,000 shares of Class B common stock, each par value $0.001 per share. As of December 31, 2017, 69,906,550 shares of Class A common stock and 24,063,246 shares of Class B common stock were issued and outstanding. As of December 31, 2016, 49,996,410 shares of Class A common stock and 37,252,138 shares of Class B common stock were issued and outstanding. Holders of Class A and Class B common stock are entitled to one vote per share and 10 votes per share, respectively, and the shares of Class A common stock and Class B common stock are identical, except for voting and conversion rights. The outstanding Class B common stock in both periods included 180,000 shares related to the Authy acquisition that were held in escrow. 121 F o r m 1 0 - K Notes to Consolidated Financial Statements (Continued) TWILIO INC. 11. Stockholders’ Equity (Continued) The Company had reserved shares of common stock for issuance as follows: Stock options issued and outstanding . . . . . . . . . . . . . . . . Nonvested restricted stock units issued and outstanding . . . Class A common stock reserved for Twilio.org . . . . . . . . . . Stock-based awards available for grant under 2016 Plan . . . Class A common stock reserved for issuance under 2016 As of December 31, 2017 2016 10,710,427 5,665,459 635,014 10,200,189 14,649,276 2,034,217 680,397 10,143,743 ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total 235,372 27,446,461 597,038 28,104,671 (d) Stock Repurchases Following the closing of the Series E convertible preferred stock financing, on August 21, 2015, the Company repurchased an aggregate of 365,916 shares of Series A preferred stock and Series B preferred stock from certain preferred stockholders, and repurchased an aggregate of 1,869,156 shares of common stock from certain current and former employees for $22.8 million in cash, which transaction is referred to as the 2015 Repurchase. The 2015 Repurchase was conducted at a price in excess of the fair value of the Company’s common stock at the date of repurchase. No special rights or privileges were conveyed to the employees and former employees. However, not all employees were invited to participate in the 2015 Repurchase. The Company recorded a compensation expense in the amount of $2.0 million for the year ended December 31, 2015, which was the excess of the common stock repurchase price above the fair value of the common stock on the date of repurchase. Of this expense, $0.8 million, $0.1 million and $1.1 million were classified as research and development, sales and marketing and general and administrative expenses, respectively, in the accompanying consolidated statement of operations. The excess of the preferred stock repurchase price above the carrying value of the preferred stock was recorded as a deemed dividend in the year ended December 31, 2015. The Company retired the shares repurchased in the 2015 Repurchase as of August 21, 2015. (e) Twilio.org On September 2, 2015, the Company’s board of directors approved the establishment of Twilio.org with 888,022 shares of the Company’s common stock, which at the time represented 1% of the Company’s outstanding capital stock on as-converted basis, reserved to fund Twilio.org’s activities. Through Twilio.org, which is a part of the Company and not a separate legal entity, the Company donates and discounts its products to nonprofits, who use the Company’s products to engage their audience, expand their reach and focus on making a meaningful change in the world. On May 13, 2016, the Company’s board of directors authorized a reduction of 107,625 shares reserved to offset equity grants to Twilio.org employees. On October 20, 2016, the Company completed its follow-on public offering. Of the net proceeds the Company received in the offering, $3.9 million was reserved to fund and support the operations of Twilio.org and the number of shares of Class A common stock reserved for Twilio.org was reduced by 100,000. In December 2016, Twilio.org donated the full $3.9 million proceeds into an independent Donor Advised Fund to further the philanthropic goals of the Company. In November 2017, Twilio.org donated 45,383 shares of Class A common stock with a fair value of $1.2 million into the same Donor Advised Fund. Both donations were recorded as charitable contributions in the accompanying consolidated statements of operations. As of December 31, 2017, the total remaining shares reserved for Twilio.org was 635,014. 122 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 12. Stock-Based Compensation 2008 Stock Option Plan The Company maintained a stock plan, the 2008 Stock Option Plan, as amended and restated (the ‘‘2008 Plan’’), which allowed the Company to grant incentive (‘‘ISO’’), non-statutory (‘‘NSO’’) stock options and restricted stock units (‘‘RSU’’) to its employees, directors and consultants to participate in the Company’s future performance through stock-based awards at the discretion of the board of directors. Under the 2008 Plan, options to purchase the Company’s common stock could not be granted at a price less than fair value in the case of ISOs and NSOs. Fair value was determined by the board of directors, in good faith, with input from valuation consultants. On June 22, 2016, the plan was terminated in connection with the Company’s IPO. Accordingly, no shares are available for future issuance under the 2008 Plan. The 2008 Plan continues to govern outstanding equity awards granted thereunder. The Company’s right of first refusal for outstanding equity awards granted under the 2008 Plan terminated upon completion of the IPO. Options granted include provisions for early exercisability. 2016 Stock Option Plan The Company’s 2016 Stock Option and Incentive Plan (the ‘‘2016 Plan’’) became effective on June 21, 2016. The 2016 Plan provides for the grant of ISOs, NSOs, restricted stock, RSUs, stock appreciation rights, unrestricted stock awards, performance share awards, dividend equivalent rights and cash-based awards to employees, directors and consultants of the Company. A total of 11,500,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 Plan. These available shares automatically increase each January 1, beginning on January 1, 2017, by 5% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31, or such lesser number of shares as determined by the Company’s compensation committee. On January 1, 2017, the shares available for grant under the 2016 Plan were automatically increased by 4,362,427 shares. Under the 2016 Plan, the stock options are granted at a price per share not less than 100% of the fair market value per share of the underlying common stock on the date of grant. Under both plans, stock options generally expire 10 years from the date of grant and vest over periods determined by the board of directors. The vesting period for new-hire options and restricted stock units is generally a four-year term from the date of grant, at a rate of 25% after one year, then monthly or quarterly, respectively, on a straight-line basis thereafter. In July 2017, the Company began granting restricted stock units to existing employees that vest in equal quarterly installments over a four year service period. 2016 Employee Stock Purchase Plan The Company’s Employee Stock Purchase Plan (‘‘2016 ESPP’’) became effective on June 21, 2016. A total of 2,400,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 ESPP. These available shares will automatically increase each January 1, beginning on January 1, 2017, by the lesser of 1,800,000 shares of the common stock, 1% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s compensation committee. On January 1, 2017, the shares available for grant under the 2016 Plan were automatically increased by 872,485 shares. 123 F o r m 1 0 - K TWILIO INC. Notes to Consolidated Financial Statements (Continued) 12. Stock-Based Compensation (Continued) The 2016 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a discount of up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. Except for the initial offering period, the 2016 ESPP provides for separate six-month offering periods beginning in May and November of each fiscal year, starting in May 2017. On each purchase date, eligible employees will purchase the Company’s stock at a price per share equal to 85% of the lesser of (i) the fair market value of the Company’s Class A common stock on the offering date or (ii) the fair market value of the Company’s Class A common stock on the purchase date. In the year ended December 31, 2017, 794,142 shares of Class A common stock were purchased under the 2016 ESPP and 235,372 shares are expected to be purchased in the second quarter of 2018. As of December 31, 2017, total unrecognized compensation cost related to the 2016 ESPP was $1.1 million, which will be amortized over a weighted-average period of 0.4 years. No ESPP shares were purchased in the year ended December 31, 2016. Stock options activity under the 2008 Plan and 2016 Plan was as follows: Stock Options Outstanding options as of December 31, 2016 . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited and cancelled . . . . . . . . . . . . . . . . . . . . Number of options outstanding 14,649,276 1,526,450 (5,194,905) (825,394) Outstanding options as of December 31, 2017 . . . . . 10,155,427 Options vested and exercisable as of December 31, Weighted- average exercise price (per share) Weighted- average remaining contractual term (in years) Aggregate intrinsic value (in thousands) $ 6.14 30.66 4.93 7.76 $10.31 7.52 $332,716 7.12 $145,763 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,278,003 $ 5.53 6.28 $ 95,354 Aggregate intrinsic value represents the difference between the Company’s estimated fair value of its common stock and the exercise price of outstanding ‘‘in-the-money’’ options. Prior to the IPO, the fair value of the Company’s common stock was estimated by the Company’s board of directors. After the IPO, the fair value of the Company’s common stock is the Company’s Class A common stock price as reported on the New York Stock Exchange. The aggregate intrinsic value of stock options exercised was $132.0 million, $54.4 million and $10.1 million, during the years ended December 31, 2017, 2016 and 2015, respectively. The total estimated grant date fair value of options vested was $15.8 million, $15.3 million and $8.2 million during the years ended December 31, 2017, 2016 and 2015, respectively. The weighted- average grant-date fair value of options granted was $13.33, $5.52 and $4.30 during the years ended December 31, 2017, 2016 and 2015, respectively. 124 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 12. Stock-Based Compensation (Continued) On February 28, 2017, the Company granted a total of 555,000 shares of performance-based stock options in three distinct awards to an employee with grant date fair values of $13.48, $10.26 and $8.41 per share for a total grant value of $5.9 million. The first half of each award vests upon satisfaction of a performance condition and the remainder vests thereafter in equal monthly installments over a 24-month period. The achievement window expires after 4.3 years from the date of grant and the stock options expire seven years after the date of grant. The stock options are amortized over a derived service period, as adjusted, of 3.4 years, 4.6 years and 5.3 years, respectively. The stock options value and the derived service period were estimated using the Monte-Carlo simulation model. The following table summarizes the details of the performance options: Weighted- average exercise price (per share) Weighted- average remaining contractual term (in years) Aggregate intrinsic value (in thousands) Outstanding options as of December 31, 2016 . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited and cancelled . . . . . . . . . . . . . . . . . . . . Number of options outstanding — 555,000 — — Outstanding options as of December 31, 2017 . . . . . . 555,000 $ — 31.72 — — $31.72 Options vested and exercisable as of December 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ — — $— 6.0 — $— $— As of December 31, 2017, total unrecognized compensation cost related to nonvested stock options was $34.8 million, which will be amortized on a ratable basis over a weighted-average period of 2.12 years. Restricted Stock Units Nonvested RSUs as of December 31, 2016 . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited and cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of options outstanding 2,034,217 4,826,508 (711,371) (483,895) Nonvested RSUs as of December 31, 2017 . . . . . . . . . . . . . . . . . 5,665,459 Weighted- average grant date fair value (per share) $32.66 28.05 30.29 29.53 $29.29 Aggregate intrinsic value (in thousands) $ 58,687 $133,648 F o r m 1 0 - K Prior to the completion of the Company’s IPO, the Company granted RSUs (‘‘Pre-IPO RSUs’’) under its 2008 Plan to its employees that vested upon the satisfaction of both a time-based service condition and a liquidity condition. The time-based service condition for the majority of these awards will be satisfied over a period of four years. The liquidity condition was satisfied upon occurrence of the Company’s IPO in June 2016. RSUs granted on or after the completion of the Company’s IPO (‘‘Post-IPO RSUs’’) are granted under the 2016 Plan and are subject to a time-based vesting condition only. The compensation expense related to these grants is based on the grant date fair value of the RSUs and is recognized on a ratable basis over the applicable service period. The majority of Post-IPO RSUs are earned over a service period of two to four years. 125 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 12. Stock-Based Compensation (Continued) As of December 31, 2017, total unrecognized compensation cost related to nonvested RSUs was $148.0 million, which will be amortized over a weighted-average period of 3.3 years. Equity Awards Granted to Nonemployees As of December 30, 2017, there were no nonemployee awards outstanding. In September 2016, the Company granted 30,255 restricted stock units to a nonemployee. The award fully vested in August 2017. Total stock-based compensation expense recorded for this award during the years ended December 31, 2017 and 2016, was $0.4 million and $0.6 million, respectively. In December 2015, the Company granted 30,000 stock options to another nonemployee. On January 1, 2017 due to the employee status change, the grant was converted into a standard award and the fair value accounting stopped. Total stock-based compensation expense recorded for this award in the year ended December 31, 2016, was $0.3 million. Early Exercise of Nonvested Options Under the 2008 Plan, employees have an option to exercise their stock options prior to vesting. The Company has the right to repurchase, at the original issuance price, any unvested (but issued) common shares upon termination of service of an employee, either voluntarily or involuntarily. The consideration received for an early exercise of a stock option is considered to be a deposit of the exercise price and the related amount is recorded as a liability. The liability is reclassified into stockholders’ equity as the stock options vest. As of December 31, 2017 and 2016, the Company recorded a liability of $0.03 million and $0.3 million for 5,214 and 49,580 unvested shares, respectively, that were early exercised by employees and were subject to repurchase at the respective period end. These amounts are reflected in current and non-current liabilities on the Company’s consolidated balance sheets. Valuation Assumptions The fair value of employee stock options was estimated on the date of grant using the following assumptions in the Black-Scholes option pricing model: Year Ended December 31, 2017 2016 2015 Employee Stock Options Fair value of common stock . . . . Expected term (in years) . . . . . . Expected volatility . . . . . . . . . . Risk-free interest rate . . . . . . . . Dividend rate . . . . . . . . . . . . . . Employee Stock Purchase Plan Expected term (in years) . . . . . . Expected volatility . . . . . . . . . . Risk-free interest rate . . . . . . . . Dividend rate . . . . . . . . . . . . . . $23.60 - $31.96 6.08 $10.09 - $15.00 6.08 44.3% - 47.6% 51.4% - 53.0% 47.8% - 54.9% 1.3% - 1.5% 1.9% - 2.3% 0% 0% $7.07 - $10.09 6.08 1.4% - 2.0% 0% 0.5 33.2% - 33.9% 1.1% - 1.4% 0% 0.90 52% 0.6% 0% — — — — 126 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 12. Stock-Based Compensation (Continued) The following assumptions were used in the Monte Carlo simulation model to estimate the fair value and the derived service period of the performance options: Asset volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock price at grant date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40% 45% 14% $31.72 Stock-Based Compensation Expense The Company recorded the total stock-based compensation expense as follows (in thousands): Year Ended December 31, 2017 2016 2015 Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . $ 650 22,808 9,822 16,339 $ 291 12,946 4,972 6,016 $ 65 4,046 2,389 2,377 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $49,619 $24,225 $8,877 13. Net Loss Per Share Attributable to Common Stockholders The following table sets forth the calculation of basic and diluted net loss per share attributable to common stockholders during the periods presented (in thousands, except per share data): Year Ended December 31, 2017 2016 2015 Net loss attributable to common stockholders . . . . . . . . . . . . $ (63,708) $ (41,324) $ (38,896) Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted . . . 91,224,607 53,116,675 17,746,526 Net loss per share attributable to common stockholders, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.70) $ (0.78) $ (2.19) F o r m 1 0 - K 127 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 13. Net Loss Per Share Attributable to Common Stockholders (Continued) The following outstanding shares of common stock equivalents were excluded from the calculation of the diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive: Year Ended December 31, 2017 2016 2015 Convertible preferred stock outstanding . . . . . . . . . . . . . . . . . . Stock options issued and outstanding . . . . . . . . . . . . . . . . . . . . Nonvested restricted stock units issued and outstanding . . . . . . . Class A common stock reserved for Twilio.org . . . . . . . . . . . . . . Class A common stock committed under 2016 ESPP . . . . . . . . . Unvested shares subject to repurchase . . . . . . . . . . . . . . . . . . . — 10,710,427 5,665,459 635,014 235,372 5,214 — 54,508,441(1) 14,649,276 2,034,217 680,397 597,038 49,580 16,883,837 71,000 888,022 — 52,407 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,251,486 18,010,508 72,403,707 (1) Includes 687,885 shares as of December 31, 2015 of Series T convertible preferred stock related to the Authy acquisition held in escrow. 14. Income Taxes The following table presents domestic and foreign components of loss before income taxes for the periods presented (in thousands): United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International $(46,737) $(14,002) $(23,962) (11,420) (26,996) (16,266) Loss before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . $(63,003) $(40,998) $(35,382) Provision for income taxes consists of the following (in thousands): Year Ended December 31, 2017 2016 2015 Year Ended December 31, 2017 2016 2015 Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99 78 823 $ — $ — 45 213 83 214 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 297 258 Deferred: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 10 (333) (295) 2 — 27 29 (109) — (27) (136) Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 705 $326 $ 122 128 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 14. Income Taxes (Continued) The following table presents a reconciliation of the statutory federal tax rate and the Company’s effective tax rate for the years ended December 31, 2017, 2016 and 2015: Year Ended December 31, 2017 2016 2015 Tax benefit at federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) State tax, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign rate differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11) Reserve for uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (12) — (14) Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Change in federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34% 34% 34% 11 10 23 47 2 8 (23) (8) (46) (34) (45) — (2) (1) Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)% (1)% —% Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the Company’s deferred tax assets and liabilities (in thousands): As of December 31, 2017 2016 2015 Deferred tax assets: Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued and prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development credits . . . . . . . . . . . . . . . . . . . . . . . . . Charitable contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,138 9,140 7,131 16,212 1,233 472 $ 31,090 16,698 5,368 7,807 1,458 — $ 27,401 7,603 1,433 6,022 — — Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,326 (78,900) 62,421 (49,601) 42,459 (35,613) Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,426 12,820 6,846 Deferred tax liabilities: Capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,664) (1,015) (2,101) (2,380) (718) (7,086) (452) (152) (4,931) (201) (4,084) (2,035) (460) (240) — Net deferred tax asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,452) $ (2) $ 27 F o r m 1 0 - K 129 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 14. Income Taxes (Continued) As of December 31, 2017, the Company had approximately $229.3 million in federal net operating loss carryforwards and $12.6 million in federal tax credits. If not utilized, the federal net operating loss and tax credit carryforwards will expire at various dates beginning in 2029. As of December 31, 2017, the Company had approximately $159.6 million in state net operating loss carryforwards and $11.0 million in state tax credits. If not utilized, the state net operating loss carryforwards will expire at various dates beginning in 2026. The California state tax credits can be carried forward indefinitely. A limitation may apply to the use of the net operating loss and credit carryforwards, under provisions of the Internal Revenue Code of 1986, as amended, and similar state tax provisions that are applicable if the Company experiences an ‘‘ownership change.’’ An ownership change may occur, for example, as a result of issuance of new equity. Should these limitations apply, the carryforwards would be subject to an annual limitation, resulting in a potential reduction in the gross deferred tax assets before considering the valuation allowance. The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. The Company primarily considered such factors as its history of operating losses, the nature of the Company’s deferred tax assets, and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. At present, the Company does not believe that it is more likely than not that the net deferred tax assets will be realized, accordingly, a full valuation allowance has been established. The valuation allowance increased by approximately $29.3 million and $14.0 million during the years ended December 31, 2017 and 2016, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Year Ended December 31, 2017 2016 2015 Unrecognized tax benefit, beginning of year . . . . . . . . . . . . . . . . . . . . . . Gross increases for tax positions of prior years . . . . . . . . . . . . . . . . . . . . Gross decrease for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . Gross increases for tax positions of current years . . . . . . . . . . . . . . . . . . . $12,275 493 (6,331) 3,008 $ 1,679 1,996 — 8,600 $1,024 — — 655 Unrecognized tax benefit, end of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,445 $12,275 $1,679 As of December 31, 2017, the Company had approximately $9.4 million of unrecognized tax benefits. If the $9.4 million is recognized, $0.4 million would affect the effective tax rate. The remaining amount would be offset by the reversal of related deferred tax assets which are subject to a full valuation allowance. The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2017, the Company has accumulated $35,000 in both interest and penalties related to uncertain tax positions. The Company does not anticipate any significant changes within 12 months of December 31, 2017, in its uncertain tax positions that would be material to the consolidated financial statements taken as a 130 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 14. Income Taxes (Continued) whole because nearly all of the unrecognized tax benefit has been offset by a deferred tax asset, which has been reduced by a valuation allowance. The Company files U.S. federal income tax returns as well as income tax returns in many U.S. states and foreign jurisdictions. As of December 31, 2017, the tax years 2008 through the current period remain open to examination by the major jurisdictions in which the Company is subject to tax. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years, which have been carried forward and may be audited in subsequent years when utilized. The Company is not currently subject to U.S. federal, state and local, or non-U.S. income tax examinations by any tax authorities. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (‘‘Tax Act’’). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax (BEAT), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. We remeasured certain deferred tax assets and liabilities based on rates at which they are expected to reverse in the future, which is generally 21%. The rate reduction would generally take effect on January 1, 2018. Consequently, any changes in the US corporate income tax rate will impact the carrying value of our deferred tax assets. Under the new corporate income tax rate of 21%, U.S. federal and state deferred tax assets will decrease by approximately $28.0 million and the valuation allowance will decrease by approximately $28.0 million. Due to the valuation allowance on the deferred tax assets, the provisional amount recorded related to the remeasurement was zero. The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. Our accounting for the following element of the Tax Act is complete. Reduction of U.S. federal corporate tax rate: The Act reduces the corporate tax rate to 21%, effective January 1, 2018. Consequently, we have recorded a decrease to our federal and state deferred tax assets of $28.0 million, with a corresponding net adjustment to valuation allowance of $28.0 million for the year ended December 31, 2017. 131 F o r m 1 0 - K TWILIO INC. Notes to Consolidated Financial Statements (Continued) 14. Income Taxes (Continued) Our accounting for the following elements of the Tax Act is incomplete, and we were not yet able to make reasonable estimates of the effects. Therefore, no provisional adjustments were recorded. Indefinite reinvestment assertion: Although the mandatory deemed repatriation tax has removed U.S. federal taxes on distributions to the U.S., the Company continues to evaluate the expected manner of recovery to determine whether or not to continue to assert indefinite reinvestment on a part or all the foreign undistributed earnings. This requires the Company to re-evaluate its reinvestment policies in light of the 2017 Act and calculate the tax cost that is incremental to the deemed repatriation tax, (e.g. foreign withholding, state income taxes of repatriating cash to the U.S. While the provisional tax expense for the year ended December 31, 2017 is based upon an assumption that foreign undistributed earnings are indefinitely reinvested, the Company’s plan may change upon the completion of the analysis of the impact of the 2017 Act and completion of the calculation of the incremental tax effects on the repatriation of foreign undistributed earnings. In the event the Company determines not to continue to assert the permanent reinvestment of part or all of foreign undistributed earnings, such a determination could result in the accrual and payment of additional foreign, state and local taxes. Global intangible low taxed income (GILTI): The Tax Act creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s ‘‘net CFC tested income’’ over the net deemed tangible income return, which is currently defined as the excess of (1) 10% of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the ‘‘period cost method’’) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the ‘‘deferred method’’). Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether we expect to have future U.S. inclusions in taxable income related to GILTI depends on not only our current structure and estimated future results of global operations but also our intent and ability to modify our structure and/or our business, we are not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, we have not made any adjustments related to potential GILTI tax in our financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI. 15. Employee Benefit Plan The Company sponsors a 401(k) defined contribution plan covering all employees. There were no employer contributions to the plan in the years ended December 31, 2015. The employer contribution to the plan in the year ended December 31, 2017 and 2016 was $1.8 million and $1.1 million, respectively. 132 TWILIO INC. Notes to Consolidated Financial Statements (Continued) 16. Transactions With Investors In 2015, two of the Company’s vendors participated in the Company’s Series E convertible preferred stock financing and owned approximately 1.9% and 1.0% , respectively, of the Company’s capital stock, on an as-if converted basis, as of December 31, 2017; 2.0% and 1.0%, respectively, of the Company’s capital stock, on as-if converted basis, as of December 31, 2016; and 2.5% and 1.2%, respectively, of the Company’s outstanding capital stock as of December 31, 2015. During the years ended December 31, 2017, 2016 and 2015, the amounts of software services the Company purchased from the first vendor were $20.4 million, $14.5 million and $11.1 million, respectively. The amounts due to this vendor as of December 31, 2017 and 2016 were $0.2 million and none, respectively. The amount due from this vendor as of December 31, 2017 and 2016 were $1.2 million and $0.3 million, respectively. In October 2016, the Company entered into a three-year agreement with this vendor to purchase services for an aggregate purchase commitment amount of $57.7 million over the course of the three-year contractual period. The amount of services the Company purchased from the second vendor was $0.8 million in the year ended December 31, 2017, and $0.5 million for each of the years ended December 31, 2016 and 2015. The amounts due to this vendor as of December 31, 2017 and 2016 were insignificant. The amounts due from this vendor as of December 31, 2017 and 2016 were none and $1.0 million, respectively. *********** F o r m 1 0 - K 133 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of December 31, 2017, our disclosure controls and procedures were not effective as a result of the material weakness in our internal control over financial reporting related to accounting for capitalized software development costs as described below. Notwithstanding the foregoing, our management has concluded that the consolidated financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in this Annual Report on Form 10-K in conformity with GAAP. (b) Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer and oversight of the board of directors, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017 based upon the framework in ‘‘Internal Control—Integrated Framework (2013)’’ issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management concluded that our internal control over financial reporting was not effective due to the material weakness in controls related to the accounting for capitalized software described below. The Company did not obtain or generate sufficient relevant quality information to support the design and functioning of control activities over the accounting for capitalized software development costs. Specifically, the Company’s process level control over internal use software development costs did not effectively track and categorize software development costs incurred during the application development stage to quantify amounts that should be capitalized as a long-lived asset, rather than expensed as research and development expenses. Additionally, the review control of the capitalized software development costs was not operating at a sufficient level of precision to identify potential material misstatements. These control deficiencies did not result in a material misstatement to the Company’s research and development expenses and long-lived assets as of and for the year ended December 31, 2017. These 134 control deficiencies create a reasonable possibility that a material misstatement in the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. KPMG, LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of the audit, has issued an adverse opinion on the effectiveness of our internal control over financial reporting as of December 31, 2017, which is included on page 86 in this Form 10-K. (c) Changes in Internal Control Except for the material weakness discussed above, there were no changes in our internal control over financial reporting in connection with the evaluation required by Rules 13a-15 (d) and 15d-15 (d) of the Exchange Act that occurred during the quarter ended December 31, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. (d) Inherent Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. (e) Plan for Remediation of a Material Weakness in Internal Control over Accounting for Capitalized Software Our management will strengthen the design of control activities around the determination of software development costs that meet the criteria for capitalization, including guidelines for how to conduct and document management reviews of conclusions over software development activities that are to be capitalized and will establish controls to obtain or generate relevant, quality information to support the functioning of these control activities. These actions are subject to ongoing review by our management, as well as oversight by our board of directors. Although we plan to complete this remediation process as quickly as possible, we cannot, at this time, estimate when such remediation may occur, and our initiatives may not prove successful in remediating this material weakness. Item 9B. Other Information Not applicable. F o r m 1 0 - K 135 Item 10. Directors, Executive Officers and Corporate Governance Part III The information required by this item is incorporated by reference to our Proxy Statement relating to our 2018 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2017. Codes of Business Conduct and Ethics Our board of directors has adopted a Code of Business Conduct and Ethics that applies to all officers, directors and employees, which is available on our website at (investors.twilio.com) under ‘‘Governance Documents’’. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendments to, or waiver from, a provision of our Code of Business Conduct and Ethics and by posting such information on the website address and location specified above. Item 11. Executive Compensation The information required by this item is incorporated by reference to our Proxy Statement relating to our 2018 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2017. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference to our Proxy Statement relating to our 2018 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2017. Item 13. Certain Relationships and Related Transactions and Director Independence The information required by this item is incorporated by reference to our Proxy Statement relating to our 2018 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2017. Item 14. Principal Accountant Fees and Services The information required by this item is incorporated by reference to our Proxy Statement relating to our 2018 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2017. 136 Part IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this report: 1. Financial Statements See Index to Financial Statements at Item 8 herein. 2. Financial Statement Schedules Schedules not listed above have been omitted because they are not required, not applicable, or the required information is otherwise included. 3. Exhibits The exhibits listed below are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference, in each case as indicated below. F o r m 1 0 - K 137 Exhibit Number 3.1 EXHIBIT INDEX Description Form File No. Exhibit Filing Date Incorporated by Reference Amended and Restated Certificate of Incorporation of Twilio Inc. S-1A 333-211634 3.1 3.2 Amended and Restated Bylaws of Twilio Inc. S-1A 333-211634 3.3 4.1 4.2 Form of Class A common stock certificate of Twilio Inc. S-1 333-211634 4.1 Amended and Restated Investors’ Rights Agreement, dated April 24, 2015, between Twilio Inc. and certain of its stockholders S-1 333-211634 4.2 10.1* Form of Indemnification Agreement S-1A 333-211634 10.1 10.2* Twilio Inc. 2008 Stock Option Plan, as S-1 333-211634 10.2 amended and restated, and forms of Stock Options Agreement and form of Stock Option Grant Notice 10.3* Twilio Inc 2016 Stock Option and Incentive Plan, and forms of Agreements thereunder S-1 333-211634 10.3 10.4 Office Lease, dated January 8, 2016, as amended January 8, 2016, between Twilio Inc. and Bay Area Headquarters Authority S-1 333-211634 10.6 10.5* Twilio Inc. 2016 Employee Stock Purchase Plan S-1 333-211634 10.8 10.6* Offer letter with George Hu, dated 8-K 001-37806 10.1 February 28, 2017 10.7* Amended and Restated Executive Severance 10-Q 001-37806 10.1 Plan, dated June 12, 2017 21.1 List of subsidiaries of the Registrant 23.1 31.1 31.2 Consent of KPMG, LLP, Independent Registered Public Accounting Firm Certification of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 138 June 13, 2016 June 13, 2016 May 26, 2016 May 26, 2016 June 13, 2016 May 26, 2016 May 26, 2016 May 26, 2016 May 26, 2016 March 3, 2017 August 11, 2017 Filed herewith Filed herewith Filed herewith Filed herewith Exhibit Number Description Form File No. Exhibit Filing Date Incorporated by Reference 32.1** Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS XBRL Instance Document. 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE XBRL Taxonomy Extension Schema Document. XBRL Taxonomy Extension Calculation Linkbase Document. XBRL Taxonomy Extension Definition Linkbase Document. XBRL Taxonomy Extension Label Linkbase Document. XBRL Taxonomy Extension Presentation Linkbase Document. Furnished herewith Filed herewith Filed herewith Filed herewith Filed herewith Filed herewith Filed herewith * Indicates a management contract or compensatory plan or arrangement. ** The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed ‘‘filed’’ for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference. Item 16. Form 10-K Summary None. F o r m 1 0 - K 139 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SIGNATURES Twilio Inc. Date: March 1, 2018 /s/ JEFFREY LAWSON Jeffrey Lawson Director and Chief Executive Officer (Principal Executive Officer) Date: March 1, 2018 /s/ LEE KIRKPATRICK Lee Kirkpatrick Chief Financial Officer (Principal Accounting and Financial Officer) Date: March 1, 2018 Date: March 1, 2018 Date: March 1, 2018 Date: March 1, 2018 Date: March 1, 2018 Date: March 1, 2018 /s/ RICHARD DALZELL Richard Dalzell Director /s/ BYRON DEETER Byron Deeter Director /s/ ELENA DONIO Elena Donio Director /s/ JAMES MCGEEVER James McGeever Director /s/ ERIKA ROTTENBERG Erika Rottenberg Director /s/ JEFF EPSTEIN Jeff Epstein Director 140 List of Subsidiaries of Twilio Inc. Twilio UK Limited (England and Wales) Twilio Estonia O ¨U (Estonia) Aquarius Survivor LLC (Delaware, United States) Twilio Colombia S.A.S. (Colombia) Twilio IP Holding Limited (Ireland) Twilio Ireland Limited (Ireland) Twilio Germany GmbH (Germany) Twilio Hong Kong Limited (Hong Kong) Twilio Singapore Pte. Ltd. (Singapore) Twilio Spain, S.L.(Spain) Burgundy Acquisition LLC (Delaware, United States) Twilio Sweden AB (Sweden) Beepsend Invest AB (Sweden) Twilio Australia Pty Ltd (Australia) Exhibit 21.1 F o r m 1 0 - K Consent of Independent Registered Public Accounting Firm Exhibit 23.1 The Board of Directors Twilio Inc.: We consent to the incorporation by reference in the registration statement (No. 333-212191) on Form S-8 of Twilio Inc. of our reports dated March 1, 2018, with respect to the consolidated balance sheets of Twilio Inc. as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the ‘‘consolidated financial statements’’), and the effectiveness of internal control over financial reporting as of December 31, 2017, which reports appear in the December 31, 2017 annual report on Form 10-K of Twilio Inc.. Our report dated March 1, 2018, on the effectiveness of internal control over financial reporting as of December 31, 2017, expresses our opinion that Twilio Inc. did not maintain effective internal control over financial reporting as of December 31, 2017 because of the effect of a material weakness on the achievement of the objectives of the control criteria and contains an explanatory paragraph that states a material weakness related to obtaining or generating relevant quality information to support the design and functioning of control activities over the accounting for capitalized software costs, has been identified and included in management’s assessment. /s/ KPMG LLP San Francisco, California March 1, 2018 CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 31.1 I, Jeffrey Lawson, certify that: 1. I have reviewed this Annual Report on Form 10-K of Twilio Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 1, 2018 /s/ JEFFREY LAWSON Jeffrey Lawson Chief Executive Officer (Principal Executive Officer) F o r m 1 0 - K CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 31.2 I, Lee Kirkpatrick certify that: 1. I have reviewed this Annual Report on Form 10-K of Twilio Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 1, 2018 /s/ LEE KIRKPATRICK Lee Kirkpatrick Chief Financial Officer (Principal Accounting and Financial Officer) Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the ‘‘Exchange Act’’) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Jeffrey Lawson, Chief Executive Officer of Twilio Inc. (the ‘‘Company’’), and Lee Kirkpatrick, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge: 1. The Company’s Annual Report on Form 10-K for the year ended December 31, 2017, to which this Certification is attached as Exhibit 32.1 (the ‘‘Periodic Report’’), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 1, 2018 /s/ JEFFREY LAWSON Jeffrey Lawson Chief Executive Officer (Principal Executive Officer) /s/ LEE KIRKPATRICK Lee Kirkpatrick Chief Financial Officer (Principal Accounting and Financial Officer) F o r m 1 0 - K (This page has been left blank intentionally.) LEADERSHIP M A N A G E M E N T Jeff Lawson Lee Kirkpatrick Co-founder, CEO & Chairman CFO George Hu COO Karyn Smith General Counsel Marty Réaume Ott Kaukver Patrick Malatack Christine Roberts Chief People Officer VP & GM, Voice & Video VP & GM, Messaging VP & GM, Super Network Erin Reilly VP, Social Impact & GM, Twilio.org Marc Boroditsky Sara Varni Ron Huddleston Senior VP of Sales Chief Marketing Officer Chief Partners Officer B O A R D Jeff Lawson Rick Dalzell Co-founder, CEO & Chairman Former SVP & CIO, Amazon Byron Deeter Partner, Bessemer Venture Partners Elena Donio CEO, Axiom Jeff Epstein Jim McGeever Erika Rottenberg Operating Partner, Bessemer EVP, Oracle NetSuite Former General Counsel, Venture Partners Global Business Unit LinkedIn A U D I T O R S KPMG LLC T R A N S F E R A G E N T & R E G I S T R A R Computershare Trust Company, N.A. twilio.com 

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