Zillow Group, Inc.
ZILLOW INC (Form: 10-Q, Received: 05/08/2014 12:07:00)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934

For the quarterly period ended March 31, 2014

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-35237

 

 

ZILLOW, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Washington   20-2000033

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

1301 Second Avenue, Floor 31, Seattle, Washington   98101
(Address of principal executive offices)   (Zip Code)

(206) 470-7000

https://twitter.com/zillow

(Registrant’s telephone number, including area code)

 

 

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   x     No   ¨

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   x     No   ¨

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

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of April 30, 2014, 33,559,096 shares of Class A common stock and 6,267,447 shares of Class B common stock were outstanding.

 

 

 


Table of Contents

ZILLOW, INC.

Quarterly Report on Form 10-Q

For the Three Months Ended March 31, 2014

T ABLE OF CONTENTS

 

          Page  
   PART I – FINANCIAL INFORMATION   

Item 1.

   Financial Statements (unaudited)      2   
   Condensed Balance Sheets      2   
   Condensed Statements of Operations      3   
   Condensed Statements of Cash Flows      4   
   Notes to Condensed Financial Statements      5   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      15   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      24   

Item 4.

   Controls and Procedures      25   
   PART II – OTHER INFORMATION   

Item 1.

   Legal Proceedings      26   

Item 1A.

   Risk Factors      26   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      27   

Item 4.

   Mine Safety Disclosures      27   

Item 6.

   Exhibits      28   
   Signatures      29   

 

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As used in this Quarterly Report on Form 10-Q, the terms “Zillow,” “the Company,” “we,” “us” and “our” refer to Zillow, Inc., unless the context indicates otherwise.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including Part I, Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), contains forward-looking statements based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements that are not historical facts and generally may be identified by terms such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including but not limited to, our ability to maintain and effectively manage an adequate rate of growth; the impact of the real estate industry on our business; our ability to innovate and provide products and services that are attractive to our users and advertisers; our ability to increase awareness of the Zillow brand in a cost-effective manner; our ability to maintain or establish relationships with listings and data providers; our ability to attract consumers to our mobile applications and websites; our ability to successfully integrate and realize the benefits of our past or future strategic acquisitions or investments; our ability to compete successfully against existing or future competitors; the reliable performance of our network infrastructure and content delivery process; and our ability to protect our intellectual property. Further discussion of factors that may affect our business and results of operations is included in Part 1, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2013. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements, and we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.

WHERE YOU CAN FIND MORE INFORMATION

Our filings with the Securities and Exchange Commission, or SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available on our website at www.zillow.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the SEC. The information contained on our website is not a part of this quarterly report on Form 10-Q.

Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings, and public conference calls and webcasts. We also use the following social media channels as a means of disclosing information about the company, our services and other matters and for complying with our disclosure obligations under Regulation FD:

 

    Zillow Twitter Account (https://twitter.com/zillow)

 

    Zillow Facebook Page (https://www.facebook.com/Zillow)

 

    Zillow Company Blog (http://www.zillowblog.com/)

The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts and the blog, in addition to following our investor relations website, press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this quarterly report on Form 10-Q.

 

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PAR T I – FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited)

ZILLOW, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share data, unaudited)

 

     March 31,
2014
    December 31,
2013
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 153,654      $ 201,760   

Short-term investments

     155,760        93,531   

Accounts receivable, net of allowance for doubtful accounts of $2,187 and $1,850 at March 31, 2014 and December 31, 2013, respectively

     14,859        15,234   

Prepaid expenses and other current assets

     6,817        4,987   
  

 

 

   

 

 

 

Total current assets

     331,090        315,512   

Long-term investments

     137,949        142,435   

Property and equipment, net

     31,114        27,408   

Goodwill

     93,213        93,213   

Intangible assets, net

     27,740        29,149   

Other assets

     436        346   
  

 

 

   

 

 

 

Total assets

   $ 621,542      $ 608,063   
  

 

 

   

 

 

 

Liabilities and shareholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 6,403      $ 4,724   

Accrued expenses and other current liabilities

     13,845        11,377   

Accrued compensation and benefits

     5,510        4,440   

Deferred revenue

     12,140        12,298   

Deferred rent, current portion

     632        546   
  

 

 

   

 

 

 

Total current liabilities

     38,530        33,385   

Deferred rent, net of current portion

     7,493        6,882   

Commitments and contingencies (Note 10)

    

Shareholders’ equity:

    

Preferred stock, $0.0001 par value; 30,000,000 shares authorized as of March 31, 2014 and December 31, 2013; no shares issued and outstanding as of March 31, 2014 and December 31, 2013

     —          —     

Class A common stock, $0.0001 par value; 600,000,000 shares authorized as of March 31, 2014 and December 31, 2013; 33,462,773 and 32,934,074 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively

     3        3   

Class B common stock, $0.0001 par value; 15,000,000 shares authorized as of March 31, 2014 and December 31, 2013; 6,267,447 and 6,468,892 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively

     1        1   

Additional paid-in capital

     665,895        651,913   

Accumulated deficit

     (90,380     (84,121
  

 

 

   

 

 

 

Total shareholders’ equity

     575,519        567,796   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 621,542      $ 608,063   
  

 

 

   

 

 

 

See accompanying notes to condensed financial statements.

 

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ZILLOW, INC.

CONDENSE D STATEMENTS OF OPERATIONS

(in thousands, except per share data, unaudited)

 

     Three Months Ended
March 31,
 
     2014     2013  

Revenue

   $ 66,243      $ 38,966   

Costs and expenses:

    

Cost of revenue (exclusive of amortization) (1)

     6,164        4,130   

Sales and marketing

     34,898        19,794   

Technology and development

     16,970        10,611   

General and administrative

     14,689        8,233   
  

 

 

   

 

 

 

Total costs and expenses

     72,721        42,768   
  

 

 

   

 

 

 

Loss from operations

     (6,478     (3,802

Other income

     219        55   
  

 

 

   

 

 

 

Net loss

   $ (6,259   $ (3,747
  

 

 

   

 

 

 

Net loss per share — basic and diluted

   $ (0.16   $ (0.11

Weighted-average shares outstanding — basic and diluted

     39,322        33,770   

 

(1)    Amortization of website development costs and intangible assets included in technology and development

   $ 6,784      $ 4,208   

See accompanying notes to condensed financial statements.

 

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ZILLOW, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

     Three Months Ended
March 31,
 
     2014     2013  

Operating activities

    

Net loss

   $ (6,259   $ (3,747

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     8,074        4,779   

Share-based compensation expense

     7,132        4,146   

Loss on disposal of property and equipment

     235        495   

Bad debt expense

     635        414   

Deferred rent

     697        198   

Amortization of bond premium

     812        69   

Changes in operating assets and liabilities:

    

Accounts receivable

     (260     (1,258

Prepaid expenses and other assets

     (1,920     (1,768

Accounts payable

     1,679        1,241   

Accrued expenses

     3,538        (1,710

Deferred revenue

     (158     (570
  

 

 

   

 

 

 

Net cash provided by operating activities

     14,205        2,289   

Investing activities

    

Proceeds from maturities of investments

     44,539        5,000   

Purchases of investments

     (103,094     (23,809

Purchases of property and equipment

     (7,872     (5,944

Purchases of intangible assets

     (1,147     (685
  

 

 

   

 

 

 

Net cash used in investing activities

     (67,574     (25,438

Financing activities

    

Proceeds from exercise of Class A common stock options

     5,263        5,057   
  

 

 

   

 

 

 

Net cash provided by financing activities

     5,263        5,057   

Net decrease in cash and cash equivalents during period

     (48,106     (18,092

Cash and cash equivalents at beginning of period

     201,760        150,040   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 153,654      $ 131,948   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Noncash transactions:

    

Capitalized share-based compensation

   $ 1,586      $ 777   

Write-off of fully depreciated property and equipment

   $ 1,498      $ 485   

See accompanying notes to condensed financial statements.

 

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ZILLOW, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 1. Organization and Description of Business

Zillow, Inc. was incorporated as a Washington corporation effective December 13, 2004, and we launched the initial version of our website, Zillow.com, in February 2006. Zillow operates the leading real estate and home-related information marketplaces on mobile and the Web, with a complementary portfolio of brands and products to help people find vital information about homes and connect with local professionals. In addition to our living database of homes, accessible on Zillow.com, we also own and operate Zillow Mobile, our suite of home-related mobile applications, Zillow Mortgage Marketplace, where borrowers connect with lenders to find loans and get competitive mortgage rates, Zillow Digs, our home improvement marketplace where consumers can find visual inspiration and local cost estimates, Zillow Rentals, a marketplace and suite of tools for rental professionals, Postlets, Diverse Solutions, Agentfolio, Mortech, HotPads and StreetEasy. Zillow provides products and services to help consumers through every stage of homeownership – buying, selling, renting, borrowing and remodeling.

Certain Significant Risks and Uncertainties

We operate in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, we believe that changes in any of the following areas could have a significant negative effect on us in terms of our future financial position, results of operations or cash flows: rates of revenue growth; engagement and usage of our products; scaling and adaptation of existing technology and network infrastructure; competition in our market; management of our growth; acquisitions and investments; qualified employees and key personnel; protection of our brand and intellectual property; changes in government regulation affecting our business; intellectual property infringement and other claims; protection of customers’ information and privacy concerns; and security measures related to our mobile applications and websites, among other things.

 

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed financial statements should be read in conjunction with the audited financial statements and accompanying notes as of and for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on February 18, 2014. The condensed balance sheet as of December 31, 2013, included herein, was derived from the audited financial statements as of that date.

The unaudited condensed interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of March 31, 2014, our results of operations for the three month periods ended March 31, 2014 and 2013, and our cash flows for the three months ended March 31, 2014 and 2013. The results of the three month period ended March 31, 2014 are not necessarily indicative of the results to be expected for the year ended December 31, 2014 or for any interim period or for any other future year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Estimates are used for revenue recognition, the allowance for doubtful accounts, website development costs, goodwill, recoverability of intangible assets with definite lives and other long-lived assets, and for share-based compensation. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected.

Recently Issued Accounting Standards

In July 2013, the Financial Accounting Standards Board (“FASB”) issued guidance on the presentation of certain unrecognized tax benefits in the financial statements. This guidance provides that a liability related to an unrecognized tax benefit must be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. This guidance is effective for interim and annual reporting

 

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periods beginning after December 15, 2013, with earlier adoption permitted, and may be applied prospectively or retrospectively. We adopted this guidance on January 1, 2014. The adoption of this guidance did not have a significant impact on our financial position, results of operations or cash flows, as we have provided a full valuation allowance against our net deferred tax assets.

 

Note 3. Fair Value Measurements

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

    Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

    Level 2 — Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities.

 

    Level 3 — Unobservable inputs that are supported by little or no market activity; instruments valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

We applied the following methods and assumptions in estimating our fair value measurements:

Cash equivalents — Cash equivalents are comprised of highly liquid investments, including money market funds, municipal securities and certificates of deposit, with original maturities of less than three months. The fair value measurement of these assets is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Short-term and long-term investments — Our investments consist of fixed income securities, which include U.S. government agency securities, corporate notes and bonds, municipal securities, certificates of deposit and commercial paper. Investments with maturities greater than three months but less than one year are classified as short-term investments. Investments with maturities greater than one year are classified as long-term investments. The fair value measurement of these assets is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means. Our short-term and long-term investments are classified as held-to-maturity and are recorded at amortized cost, as we do not intend to sell the investments, and it is not more likely than not that we will be required to sell these investments prior to maturity. The amortized cost of our short-term and long-term investments approximates their fair value.

Of the short-term investments and long-term investments on hand as of March 31, 2014, 53% mature on or prior to March 31, 2015, and the remaining 47% mature on or prior to March 31, 2016.

The following tables present the balances of assets measured at fair value on a recurring basis as of the dates presented (in thousands):

 

     March 31, 2014  
     Total      Level 1      Level 2  

Cash equivalents:

        

Money market funds

   $ 133,664       $ 133,664       $ —     

Municipal securities

     5,055         —           5,055   

Certificates of deposit

     1,625         —           1,625   

Short-term investments:

        

U.S government agency securities

     99,978         99,978         —     

Corporate notes and bonds

     23,942         —           23,942   

Municipal securities

     15,173         —           15,173   

Certificates of deposit

     11,682         —           11,682   

Commercial paper

     4,985         —           4,985   

Long-term investments:

        

U.S government agency securities

     65,045         65,045         —     

Corporate notes and bonds

     47,996         —           47,996   

Municipal securities

     24,609         —           24,609   

Certificates of deposit

     299         —           299   
  

 

 

    

 

 

    

 

 

 

Total

   $ 434,053       $ 298,687       $ 135,366   
  

 

 

    

 

 

    

 

 

 

 

 

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     December 31, 2013  
     Total      Level 1      Level 2  

Cash equivalents:

        

Money market funds

   $ 184,941       $ 184,941       $ —     

U.S government agency securities

     3,306         3,306         —     

Short-term investments:

        

U.S government agency securities

     78,448         78,448         —     

Commercial paper

     3,998         —           3,998   

Corporate notes and bonds

     11,085         —           11,085   

Long-term investments:

        

U.S government agency securities

     112,623         112,623         —     

Corporate notes and bonds

     29,812         —           29,812   
  

 

 

    

 

 

    

 

 

 

Total

   $ 424,213       $ 379,318       $ 44,895   
  

 

 

    

 

 

    

 

 

 

We did not have any Level 3 assets or liabilities measured at fair value on a recurring basis as of March 31, 2014 or December 31, 2013.

 

Note 4. Property and Equipment, net

The following table presents the detail of property and equipment as of the dates presented (in thousands):

 

     March 31,
2014
    December 31,
2013
 

Website development costs

   $ 52,547      $ 50,408   

Computer equipment

     9,670        8,238   

Leasehold improvements

     8,435        7,320   

Software

     2,297        1,807   

Construction-in-progress

     5,183        3,289   

Office equipment, furniture and fixtures

     4,317        3,661   
  

 

 

   

 

 

 

Property and equipment

     82,449        74,723   

Less: accumulated amortization and depreciation

     (51,335     (47,315
  

 

 

   

 

 

 

Property and equipment, net

   $ 31,114      $ 27,408   
  

 

 

   

 

 

 

We recorded amortization and depreciation expense related to property and equipment (other than website development costs) of $1.3 million and $0.6 million, respectively, during the three months ended March 31, 2014 and 2013.

We capitalized $5.6 million and $3.9 million, respectively, in website development costs during the three months ended March 31, 2014 and 2013. Amortization expense for website development costs included in technology and development expenses was $4.2 million and $2.5 million, respectively, during the three months ended March 31, 2014 and 2013.

Construction-in-progress primarily consists of website development costs that are capitalizable, but for which the associated applications had not been placed in service.

 

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Note 5. Intangible Assets

The following tables present the detail of intangible assets subject to amortization as of the dates presented (in thousands):

 

     March 31, 2014  
     Cost      Accumulated
Amortization
    Net  

Purchased content

   $ 14,115       $ (9,854   $ 4,261   

Developed technology

     18,835         (5,275     13,560   

Customer relationships

     9,775         (2,314     7,461   

Trademarks

     3,261         (803     2,458   
  

 

 

    

 

 

   

 

 

 

Total

   $ 45,986       $ (18,246   $ 27,740   
  

 

 

    

 

 

   

 

 

 

 

     December 31, 2013  
     Cost      Accumulated
Amortization
    Net  

Purchased content

   $ 12,968       $ (8,846   $ 4,122   

Developed technology

     18,835         (4,417     14,418   

Customer relationships

     9,775         (1,799     7,976   

Trademarks

     3,261         (628     2,633   
  

 

 

    

 

 

   

 

 

 

Total

   $ 44,839       $ (15,690   $ 29,149   
  

 

 

    

 

 

   

 

 

 

Amortization expense recorded for intangible assets for the three months ended March 31, 2014 and 2013 was $2.6 million and $1.7 million, respectively. These amounts are included in technology and development expenses.

 

Note 6. Income Taxes

We are subject to federal and state income taxes in the United States. During the three months ended March 31, 2014 and 2013, we did not have reportable taxable income, and we are not projecting reportable taxable income for the year ending December 31, 2014. We have provided a full valuation allowance against our net deferred tax assets as of March 31, 2014 and December 31, 2013 because, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized. Therefore, no tax liability or expense has been recorded in the financial statements. We have accumulated federal tax losses of approximately $236.5 million as of December 31, 2013, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $6.1 million (tax effected) as of December 31, 2013.

 

Note 7. Shareholders’ Equity

Our board of directors has the authority to fix and determine and to amend the number of shares of any series of preferred stock that is wholly unissued or to be established and to fix and determine and to amend the designation, preferences, voting powers and limitations, and the relative, participating, optional or other rights, of any series of shares of preferred stock that is wholly unissued or to be established, subject in each case to certain approval rights of holders of our outstanding Class B common stock. There was no preferred stock issued and outstanding as of March 31, 2014 or December 31, 2013.

Our Class A common stock has no preferences or privileges and is not redeemable. Holders of Class A common stock are entitled to one vote for each share.

Our Class B common stock has no preferences or privileges and is not redeemable. At any time after the date of issuance, each share of Class B common stock, at the option of the holder, may be converted into one share of Class A common stock, or automatically converted upon the affirmative vote by or written consent of holders of a majority of the shares of the Class B common stock. During the three months ended March 31, 2014, 201,445 shares of Class B common stock were converted into Class A common stock at the option of the holders. During the year ended December 31, 2013, 993,634 shares of Class B common stock were converted into Class A common stock at the option of the holders. Holders of Class B common stock are entitled to 10 votes for each share.

In August 2013, we sold 3,253,522 shares of our Class A common stock, including 753,522 shares of our Class A common stock pursuant to the underwriters’ option to purchase additional shares, and certain shareholders sold 2,523,486 shares of our Class A common stock, at a price of $82.00 per share. We received net proceeds of $253.9 million after deducting underwriting discounts and commissions and offering expenses payable by us. We received no proceeds from the sale of our Class A common stock by the selling shareholders.

 

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Note 8. Share-Based Awards

On July 19, 2011, our 2011 Incentive Plan (as amended and/or restated from time to time, the “2011 Plan”) became effective and replaced our 2005 Equity Incentive Plan. The 2011 Plan was subsequently amended and restated effective as of June 1, 2012, to, among other things, increase the total number of authorized shares and include the material terms of performance goals for performance-based awards. The 2011 Plan was further amended effective as of May 31, 2013 to increase the number of authorized shares of Class A common stock available for awards under the 2011 Plan by 1,500,000 shares such that a total of 3,800,000 shares of Class A common stock are available for issuance under the 2011 Plan. The 2011 Plan also contains an “evergreen” provision, pursuant to which the number of shares of Class A common stock available for issuance under the 2011 Plan can be increased on the first day of each of our fiscal years beginning in 2013 by a number of shares equal to the least of (a) 3.5% of our outstanding Class A common stock and Class B common stock on a fully diluted basis as of the end of our immediately preceding fiscal year, (b) 3,500,000 shares, and (c) a lesser amount determined by our board of directors; provided, however, that any shares from any increases in previous years that are not actually issued will continue to be available for issuance under the 2011 Plan. The 2011 Plan is administered by the compensation committee of the board of directors. Under the terms of the 2011 Plan, the compensation committee may grant equity awards, including incentive stock options, nonqualified stock options, restricted stock, restricted stock units, or restricted units to employees, officers, directors, consultants, agents, advisors and independent contractors. The compensation committee has also authorized certain senior executive officers to grant equity awards under the 2011 Plan, within limits prescribed by the compensation committee.

Stock Options

All stock options granted from inception through March 31, 2014 are nonqualified stock options, with the exception of substituted incentive stock options for 15,143 shares of Zillow’s Class A common stock that were granted in connection with the December 14, 2012 acquisition of HotPads, Inc. Options under the 2011 Plan are granted with an exercise price per share not less than 100% of the fair market value of our Class A common stock on the date of grant, with the exception of substituted stock options granted in connection with acquisitions, and are exercisable at such times and under such conditions as determined by the compensation committee. Under the 2011 Plan, the maximum term of an option is ten years from the date of grant. Any portion of an option that is not vested and exercisable on the date of a participant’s termination of service expires on such date. Employees generally forfeit their rights to exercise vested options after 3 months following their termination of employment or 12 months in the event of termination by reason of death, disability or retirement. Options granted under the 2011 Plan are typically granted with seven-year terms and typically vest 25% after 12 months and ratably thereafter over the next 36 months, except for options granted under the Stock Option Grant Program for Nonemployee Directors (“Nonemployee Director Awards”), which are fully vested and exercisable on the date of grant, and except for certain options that were granted to our chief executive officer in December 2012 and January 2013.

The following table summarizes stock option activity for the year ended December 31, 2013 and the three months ended March 31, 2014:

 

     Shares
Available
for Grant
    Number
of Shares
Subject to
Existing
Options
    Weighted-
Average
Exercise
Price Per
Share
     Weighted-
Average
Remaining
Contractual
Life (Years)
     Aggregate
Intrinsic
Value
 

Outstanding at January 1, 2013

     321,678        5,462,672      $ 14.48         4.48       $ 78,912,364   

Authorized increase in plan shares

     2,887,064        —         —          

Granted

     (1,984,157     2,009,542        43.87         

Exercised

     —         (2,026,829     9.03         

Forfeited or cancelled

     288,679        (288,679     31.93         
  

 

 

   

 

 

         

Outstanding at December 31, 2013

     1,513,264        5,156,706        27.09         5.43         283,008,505   

Authorized increase in plan shares

     1,563,827        —         —          

Granted

     (1,288,319     1,288,319        82.59         

Exercised

     —         (309,750     16.99         

Forfeited or cancelled

     60,423        (60,423     49.99         
  

 

 

   

 

 

         

Outstanding at March 31, 2014

     1,849,195        6,074,852        39.15         5.57         298,096,008   

Vested and exercisable at March 31, 2014

       1,798,723        16.03         4.05         129,635,359   

The shares available for grant identified in the above table exclude options for an aggregate of 25,385 shares, which options were granted in 2013 in substitution of options previously granted by StreetEasy, Inc. (“StreetEasy”). Pursuant to the terms of the 2011 Plan, such substituted stock option awards do not reduce the number of shares available for future issuance under the 2011 Plan. As of March 31, 2014, the numbers above do not include 87,270 shares of restricted stock and 86,832 restricted stock units outstanding under our 2011 Plan.

 

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The fair value of options granted, excluding Nonemployee Director Awards and certain options granted to the Company’s chief executive officer in December 2012 and January 2013, is estimated at the date of grant using the Black-Scholes-Merton option-pricing model, assuming no dividends and with the following assumptions for the periods presented:

 

     Three Months Ended
March 31,
     2014    2013

Expected volatility

   53%    51%

Expected dividend yields

   —      —  

Risk-free interest rate

   1.37%    0.70%

Weighted-average expected life

   4.58 years    4.58 years

Weighted-average fair value of options granted

   $36.93    $16.28

In the three months ended March 31, 2014, stock options for an aggregate of 23,010 shares of our Class A common stock were granted as Nonemployee Director Awards. The fair value of options granted for the Nonemployee Director Awards, $32.60 per share, is estimated at the date of grant using the Black-Scholes-Merton option-pricing model, assuming no dividends, expected volatility of 54%, a risk-free interest rate of 0.69%, and a weighted-average expected life of 3.5 years. During the three months ended March 31, 2014 and 2013, share-based compensation expense recognized in our statement of operations related to Nonemployee Director Awards was $0.8 million and $0.5 million, respectively, and is included in general and administrative expenses.

Restricted Stock Awards

The following table summarizes restricted stock award activity for the year ended December 31, 2013 and the three months ended March 31, 2014:

 

     Shares of
Restricted Stock
    Weighted-
Average Grant-
Date Fair
Value
 

Unvested outstanding at January 1, 2013

     340,103      $ 30.37   

Granted

     3,673        44.66   

Vested

     (108,379     30.94   

Forfeited or cancelled

     (5,270     25.92   
  

 

 

   

Unvested outstanding at December 31, 2013

     230,127        30.43   

Granted

     3,255        80.91   

Vested

     (19,026     40.18   

Forfeited or cancelled

     —          —     
  

 

 

   

Unvested outstanding at March 31, 2014

     214,356        30.33   
  

 

 

   

The fair value of the outstanding shares of restricted stock awards will be recorded as share-based compensation expense over the vesting period. As of March 31, 2014, there was $6.0 million of total unrecognized compensation cost related to restricted stock awards.

 

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Restricted Stock Units

The following table summarizes activity for restricted stock units for the year ended December 31, 2013 and the three months ended March 31, 2014:

 

     Restricted Stock
Units
    Weighted-
Average Grant-
Date Fair
Value
 

Unvested outstanding at January 1, 2013

     295,737      $ 38.76   

Granted

     97,804        81.12   

Vested

     (253,384     42.53   

Forfeited or cancelled

     (19,034     59.26   
  

 

 

   

Unvested outstanding at December 31, 2013

     121,123        64.07   

Granted

     —          —     

Vested

     (13,923     62.44   

Forfeited or cancelled

     (20,368     75.42   
  

 

 

   

Unvested outstanding at March 31, 2014

     86,832        60.55   
  

 

 

   

The fair value of restricted stock units will be recorded as share-based compensation expense over the vesting period. As of March 31, 2014, there was $5.2 million of total unrecognized compensation cost related to restricted stock units.

Share-Based Compensation Expense

The following table presents the effects of share-based compensation in our statements of operations during the periods presented (in thousands):

 

     Three Months Ended
March 31,
 
     2014      2013  

Cost of revenue

   $ 373       $ 163   

Sales and marketing

     1,303         1,227   

Technology and development

     2,025         1,034   

General and administrative

     3,431         1,722   
  

 

 

    

 

 

 

Total

   $ 7,132       $ 4,146   
  

 

 

    

 

 

 

 

Note 9. Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares (including Class A common stock and Class B common stock) outstanding during the period. In the calculation of basic net loss per share, undistributed earnings are allocated assuming all earnings during the period were distributed.

Diluted net loss per share is computed by dividing net loss by the weighted-average number of common shares (including Class A common stock and Class B common stock) outstanding during the period and potentially dilutive Class A common stock equivalents, except in cases where the effect of the Class A common stock equivalent would be antidilutive. Potential Class A common stock equivalents consist of Class A common stock issuable upon exercise of stock options and Class A common stock underlying unvested restricted stock awards and unvested restricted stock units using the treasury stock method.

For the periods presented, the following Class A common stock equivalents were excluded from the calculations of diluted net loss per share because their effect would have been antidilutive (in thousands):

 

     Three Months Ended
March 31,
 
     2014      2013  

Class A common stock issuable upon the exercise of stock options

     2,959         2,856   

Class A common stock underlying unvested restricted stock awards and restricted stock units

     97         130   
  

 

 

    

 

 

 

Total Class A common stock equivalents

     3,056         2,986   
  

 

 

    

 

 

 

In the event of liquidation, dissolution, distribution of assets or winding-up of the Company, the holders of all classes of common stock have equal rights to receive all the assets of the Company after the rights of the holders of outstanding preferred stock have been satisfied. We have not presented net loss per share under the two-class method for our Class A common stock and Class B common stock because it would be the same for each class due to equal dividend and liquidation rights for each class.

 

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Note 10. Commitments and Contingencies

Lease Commitments

We have various operating leases for office space and equipment. In March 2011, we entered into a lease for approximately 66,000 square feet of office space that houses our corporate headquarters in Seattle, Washington, for which we are obligated to make escalating monthly lease payments that began in December 2012 and continue through November 2022. In June 2012, we entered into a lease amendment for our corporate headquarters in Seattle, Washington, which increased the rentable area of the premises by 21,575 square feet, for which we are obligated to make escalating monthly lease payments that began in January 2013 and continue through November 2022. In April 2013, we entered into a second lease amendment for our corporate headquarters in Seattle, Washington, which increased the rentable area of the premises by 22,583 square feet as of October 1, 2013, and will increase the rentable area of the premises by an additional 22,583 square feet as of September 1, 2014, for which we are obligated to make escalating monthly lease payments beginning in January 2014 and December 2014, respectively, and continuing through November 2022. In January 2014, we entered into a third lease amendment for our corporate headquarters in Seattle, Washington, to increase the rentable area of the premises by 22,694 square feet as of October 1, 2016, for which we are obligated to make escalating monthly lease payments beginning in January 2017 and continuing through November 2022. In April 2012, we entered into an operating lease in Irvine, California for 20,025 square feet under which we are obligated to make escalating monthly lease payments which began in August 2012 and continue through July 2022. In September 2013, we entered into a lease amendment for our operating lease in Irvine, California, which increased the rentable area of the premises by 20,024 square feet, for which we are obligated to make escalating monthly lease payments which began in February 2014 and continue through July 2022. In November 2012, we entered into an operating lease in San Francisco, California for 18,353 square feet under which we are obligated to make escalating monthly lease payments which began in December 2012 and continue through November 2018. In February 2014, we entered into an operating lease in New York, New York for 13,300 square feet under which we are obligated to make escalating monthly lease payments beginning in August 2014 and continuing through September 2024. We lease additional office space in Chicago, Illinois, Lincoln, Nebraska, and New York, New York.

Future minimum payments for all operating leases as of March 31, 2014 are as follows (in thousands):

 

Remainder of 2014

     4,556   

2015

     7,863   

2016

     8,245   

2017

     9,298   

2018

     9,388   

All future years

     33,496   
  

 

 

 

Total future minimum lease payments

   $ 72,846   
  

 

 

 

Rent expense for the three months ended March 31, 2014 and 2013 was $1.5 million and $1.1 million, respectively.

Purchase Commitments

As of March 31, 2014, we had non-cancelable purchase commitments for content related to our mobile applications and websites totaling $12.6 million. The amounts due for this content as of March 31, 2014 are as follows (in thousands):

 

Remainder of 2014

   $ 3,503   

2015

     4,650   

2016

     3,599   

2017

     817   
  

 

 

 

Total future purchase commitments

   $ 12,569   
  

 

 

 

Letters of Credit

We have executed a standby letter of credit of $1.3 million in connection with the lease of our Seattle, Washington office space, and a standby letter of credit of $0.4 million in connection with the February 2014 lease of our New York, New York office. The letters of credit are secured by our investments and are effective until the expiration dates of the respective leases.

Legal Proceedings

In March 2010, Smarter Agent, LLC (“Smarter Agent”) filed a complaint against us and multiple other defendants, including HotPads, Inc. (“HotPads”), for patent infringement in the U.S. District Court for the District of Delaware. The complaint alleges, among other things, that our mobile technology infringes three patents held by Smarter Agent purporting to cover: a “Global

 

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positioning-based real estate database access device and method,” a “Position-based information access device and method” and a “Position-based information access device and method of searching,” and seeks an injunction against the alleged infringing activities and an unspecified award for damages. In November 2010, the U.S. Patent and Trademark Office granted our petition for re-examination of the three patents-in-suit, and, to date, all claims of all three patents remain rejected in the re-examination proceedings. In March 2011, the court granted a stay of the litigation pending the completion of the re-examination proceedings. In addition, in October 2011, Smarter Agent filed a substantially similar complaint against Diverse Solutions, Inc. (“Diverse Solutions”), StreetEasy, and other defendants, for patent infringement in the U.S. District Court for the District of Delaware. On October 31, 2011, we acquired substantially all of the operating assets and certain liabilities of Diverse Solutions, including the Smarter Agent complaint against Diverse Solutions. On August 26, 2013, we acquired StreetEasy, and took responsibility for the Smarter Agent complaint against StreetEasy. On December 14, 2012, we acquired HotPads, and took responsibility for the Smarter Agent complaint against HotPads. We have not recorded an accrual related to these complaints as of March 31, 2014 or December 31, 2013, as we do not believe a material loss is probable. It is a reasonable possibility that a loss may be incurred; however, the possible loss or range of loss is not estimable.

In September 2010, LendingTree, LLC (“LendingTree”) filed a complaint against us for patent infringement in the U.S. District Court for the Western District of North Carolina. The complaint alleged, among other things, that our website technology infringes two patents purporting to cover a “Method and computer network for coordinating a loan over the internet.” The complaint sought, among other things, a judgment that we infringed certain patents held by LendingTree, an injunction against the alleged infringing activities and an award for damages. We denied the allegations and asserted defenses and counterclaims seeking declarations that we are not infringing the patents and that the patents are invalid. On March 12, 2014, a federal jury found that Zillow does not infringe the patents and that the patents asserted by LendingTree are invalid. We have not recorded an accrual related to this complaint as of March 31, 2014 or December 31, 2013, as we do not believe a material loss is probable.

In November 2012, a securities class action lawsuit was filed in the U.S. District Court for the Western District of Washington at Seattle against us and certain of our executive officers seeking unspecified damages. A consolidated amended complaint was filed in June 2013. The complaint purports to state claims for violations of federal securities laws on behalf of a class of those who purchased our common stock between February 15, 2012 and November 6, 2012. The complaint generally alleges, among other things, that during the period between February 15, 2012 and November 6, 2012, we issued materially false and misleading statements regarding our business practices and financial results. In August 2013, we moved to dismiss the lawsuit. That motion to dismiss has been fully briefed and is pending before the Court. We have denied the allegations of wrongdoing, and we will continue to vigorously defend the claims in the lawsuit. We have not recorded an accrual related to this lawsuit as of March 31, 2014 or December 31, 2013, as we do not believe a material loss is probable. It is a reasonable possibility that a loss may be incurred; however, the possible loss or range of loss is not estimable.

In March 2014, Move, Inc., the National Association of Realtors and three related entities, filed a complaint against us and Errol Samuelson, our Chief Industry Development Officer, in the Superior Court of the State of Washington in King County, alleging, among other things, that Zillow and Mr. Samuelson misappropriated plaintiffs’ trade secrets in connection with Mr. Samuelson joining Zillow in March 2014. The complaint seeks, among other things, an injunction against the alleged misappropriations and Mr. Samuelson working for us, as well as unspecified damages. In April 2014, the court denied the plaintiffs’ motion for a preliminary injunction prohibiting Mr. Samuelson from working for us. Plaintiffs renewed their motion for a preliminary injunction and that motion is pending. We have denied the allegations of any wrongdoing and intend to vigorously defend the claims in the lawsuit. We have not recorded an accrual related to these complaints as of March 31, 2014, as we do not believe a material loss is probable.

In addition to the matters discussed above, from time to time, we are involved in litigation and claims that arise in the ordinary course of business. Although we cannot be certain of the outcome of any litigation and claims, nor the amount of damages and exposure that we could incur, we currently believe that the final disposition of such matters will not have a material effect on our financial position, results of operations or cash flow. 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.

 

Note 11. Segment Information and Revenue

We have one reportable segment. Our reportable segment has been identified based on how our chief operating decision-maker manages our business, makes operating decisions and evaluates operating performance. The chief executive officer acts as the chief operating decision-maker and reviews financial and operational information on an entity-wide basis. We have one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components. Accordingly, we have determined that we have a single reporting segment and operating unit structure.

 

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The chief executive officer reviews information about revenue categories, including marketplace revenue and display revenue. The following table presents our revenue categories during the periods presented (in thousands):

 

     Three Months Ended
March 31,
 
     2014      2013  

Marketplace revenue:

     

Real estate

   $ 46,235       $ 26,109   

Mortgages

     7,128         4,909   
  

 

 

    

 

 

 

Total Marketplace revenue

     53,363         31,018   

Display revenue

     12,880         7,948   
  

 

 

    

 

 

 

Total revenue

   $ 66,243       $ 38,966   
  

 

 

    

 

 

 

 

Note 12. Subsequent Events

In April 2014, pursuant to the terms of an Amended and Restated Executive Employment Agreement and a Restricted Stock Unit Award Notice and Restricted Stock Unit Award Agreement entered into between Zillow and an employee, Zillow granted to the employee restricted stock units for 59,320 shares of our Class A common stock, which vest quarterly over four years beginning on the vesting commencement date of March 26, 2014, subject to the recipient’s continued full-time employment or service to Zillow. In the event of termination of service or employment by Zillow without cause or upon the resignation by such employee for good reason, the employee will receive 24 months’ accelerated vesting of the restricted stock units, except that in the event of such a termination in connection with a change in control, the restricted stock units will become fully vested. The employee will be entitled to receive one share of Zillow’s Class A common stock for each then outstanding unit that becomes vested. The grant date fair value of the restricted stock units is approximately $5.4 million and will be recorded as share-based compensation expense over the vesting period.

 

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Item 2. 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 condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Statements containing words such as “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” “estimate,” or similar expressions constitute forward-looking statements. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, including in the section titled “Note Regarding Forward-Looking Statements,” and also those items listed in Part 1, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2013.

Overview

Zillow operates the leading real estate and home-related information marketplaces on mobile and the Web, with a complementary portfolio of brands and products that help people find vital information about homes and connect with local professionals. In addition to our living database of homes, accessible on Zillow.com, we also own and operate Zillow Mobile, our suite of home-related mobile applications, Zillow Mortgage Marketplace, where borrowers connect with lenders to find loans and get competitive mortgage rates, Zillow Digs, our home improvement marketplace where consumers can find visual inspiration and local cost estimates, Zillow Rentals, a marketplace and suite of tools for rental professionals, Postlets, Diverse Solutions, Agentfolio, Mortech, HotPads and StreetEasy.

Zillow provides products and services to help consumers through every stage of homeownership – buying, selling, renting, borrowing and remodeling. We are transforming the way people make home-related decisions, and enabling homeowners, buyers, sellers and renters to find and connect with local professionals best suited to meet their needs.

Our living database of more than 110 million U.S. homes—homes for sale, homes for rent and homes not currently on the market—attracts an active and vibrant community of users. Individuals and businesses that use Zillow have updated information on more than 47 million homes and added nearly 230 million home photos, creating exclusive home profiles not available anywhere else. These profiles include detailed information about homes, including property facts, listing information and purchase and sale data. We provide this information to our users where, when and how they want it, through our industry-leading mobile applications that enable consumers to access our information when they are curbside, viewing homes, and through our websites. Using complex, proprietary automated valuation models, we provide current home value estimates, or Zestimates, and current rental price estimates, or Rent Zestimates, on approximately 100 million U.S. homes.

We generate revenue from local real estate professionals, primarily on an individual subscription basis, and from mortgage professionals, rental professionals and brand advertisers. Our revenue includes marketplace revenue, consisting primarily of subscriptions sold to real estate agents based on the number of impressions delivered in zip codes purchased, and advertising sold on a cost per click, or CPC, basis to mortgage lenders, as well as display revenue, which consists of advertising placements sold primarily on a cost per thousand impressions, or CPM, basis.

During the three months ended March 31, 2014, we generated revenue of $66.2 million, as compared to $39.0 million in the three months ended March 31, 2013, an increase of 70%. This increase was primarily the result of a 56% increase in our Premier Agent subscribers to 52,968 as of March 31, 2014 from 34,030 as of March 31, 2013, as well as significant growth in traffic to our mobile applications and websites. There were approximately 70.7 million average monthly unique users of our mobile applications and websites for the three months ended March 31, 2014 compared to 46.7 million average monthly unique users for the three months ended March 31, 2013, representing year-over-year growth of 51%.

In addition, mortgages revenue increased $2.2 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013, or 45%. The increase was primarily a result of an increase in the number of loan requests submitted by consumers in Zillow Mortgage Marketplace. There were approximately 5.8 million mortgage loan requests submitted by consumers for the three months ended March 31, 2014 compared to 4.5 million mortgage loan requests submitted by consumers for the three months ended March 31, 2013, an increase of 31%.

During the three months ended March 31, 2014, sales and marketing expenses increased by $15.1 million compared to the three months ended March 31, 2013, primarily due to a $9.0 million increase in marketing and advertising expenses related to advertising spend to acquire shoppers across online and offline channels. We believe we have considerable opportunity to increase brand awareness and grow traffic through targeted advertising programs like our “Find Your Way Home” TV advertising campaign. As such, we have invested in selective advertisements to consumers and professionals in various online and offline channels that have tested well for us.

 

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As of March 31, 2014, we had 887 full-time employees, compared to 817 full-time employees as of December 31, 2013.

Key Growth Drivers

To analyze our business performance, determine financial forecasts and help develop long-term strategic plans, we frequently review the following key growth drivers:

Unique Users

Measuring unique users is important to us because our marketplace revenue depends in part on our ability to enable real estate, rental and mortgage professionals to connect with our users, and our display revenue depends in part on the number of impressions delivered. Furthermore, our community of users improves the quality of our living database of homes with their contributions. We count a unique user the first time an individual accesses our mobile applications using a mobile device during a calendar month and the first time an individual accesses one of our websites using a web browser during a calendar month. If an individual accesses our mobile applications using different mobile devices within a given month, the first instance of access by each such mobile device is counted as a separate unique user. If an individual accesses our websites using different web browsers within a given month, the first access by each such web browser is counted as a separate unique user. If an individual accesses more than one of our websites in a single month, the first access to each website is counted as a separate unique user since unique users are tracked separately for each domain. We measure unique users with Google Analytics. Beginning in September 2013, the reported monthly unique users reflect the effect of Zillow’s August 26, 2013 acquisition of StreetEasy, Inc.

 

     Average Monthly Unique
Users for the Three
Months Ended March 31,
     2013 to 2014
% Change
 
     2014      2013     
     (in thousands)         

Unique Users

     70,668         46,652         51

Premier Agent Subscribers

The number of Premier Agent subscribers is an important driver of revenue growth because each subscribing agent pays us a fee to participate in the program. We define a Premier Agent subscriber as an agent with a paid subscription at the end of a period.

 

     At March 31,      2013 to 2014
% Change
 
     2014      2013     

Premier Agent Subscribers

     52,968         34,030         56

Basis of Presentation

Revenue

We generate revenue from local real estate professionals, primarily on an individual subscription basis, and from mortgage professionals, rental professionals and brand advertisers. Our revenue includes marketplace revenue and display revenue.

Marketplace Revenue. Marketplace revenue consists of real estate revenue and mortgages revenue. Real estate revenue primarily includes subscriptions sold to real estate agents under our Premier Agent program, as well as revenue generated by Zillow Rentals. Mortgages revenue primarily includes CPC advertising related to our Zillow Mortgage Marketplace sold to mortgage lenders, as well as revenue generated by Mortech, which provides subscription-based mortgage software solutions, including a product and pricing engine and lead management platform.

Zillow’s Premier Agent program offers a suite of marketing and business technology solutions to help real estate agents grow their businesses and personal brands. The Premier Agent program allows agents to select products and services that they can tailor to meet their business and advertising needs. The program has three tiers of participation including Premier Platinum, our original flagship subscription product, as well as Premier Gold and Premier Silver, to meet different marketing and business needs of a broad range of agents. All tiers of Premier Agents receive access to a dashboard portal on our website that provides individualized program performance analytics, as well as our personalized website service, and our customer relationship management, or CRM, tool that captures detailed information about each contact made with a Premier Agent through our mobile and web platforms. Our Premier Gold product also includes featured listings whereby the agent’s listings will appear at the top of search results on our mobile and web platforms. Our Premier Platinum product includes the dashboard portal on our website, our personalized website service, our CRM tool, featured listings, and inclusion on our buyer’s agent list, whereby the agent appears as the agent to contact for listings in the purchased zip code.

We charge for our Platinum Premier Agent subscription product based on the number of impressions delivered on our buyer’s agent list in zip codes purchased and a contracted maximum cost per impression. Our Platinum Premier Agent subscription product includes multiple deliverables which are accounted for as a single unit of accounting, as the delivery or performance of the

 

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undelivered elements is based on traffic to our mobile applications and websites. We recognize revenue related to our impression-based Platinum Premier Agent subscription product based on the lesser of (i) the actual number of impressions delivered on our buyer’s agent list during the period multiplied by the contracted maximum cost per impression, or (ii) the contractual maximum spend on a straight-line basis during the contractual period over which the services are delivered, typically over a period of six months or twelve months and then month-to-month thereafter.

We charge a fixed subscription fee for our Premier Gold and Premier Silver subscription products. Subscription advertising revenue for our Premier Gold and Premier Silver subscription products is recognized on a straight-line basis during the contractual period over which the services are delivered, typically over a period of six months and then month-to-month thereafter.

In Zillow Mortgage Marketplace, participating qualified mortgage lenders make a prepayment to gain access to consumers interested in connecting with mortgage professionals. Consumers who request rates for mortgage loans in Zillow Mortgage Marketplace are presented with personalized lender quotes from participating lenders. We only charge mortgage lenders a fee when users click for more information regarding a mortgage loan quote. Mortgage lenders who exhaust their initial prepayment can then prepay additional funds to continue to participate in the marketplace. We recognize revenue when a user clicks on a mortgage advertisement or to obtain additional information about a mortgage loan quote.

Display Revenue. Display revenue primarily consists of graphical mobile and web advertising sold on a CPM basis to advertisers primarily in the real estate industry, including real estate brokerages, home builders, mortgage lenders and home services providers. Our advertising customers also include telecommunications, automotive, insurance and consumer products companies. We recognize display revenue as impressions are delivered to users interacting with our mobile applications or websites. Growth in display revenue depends on continuing growth in traffic to our mobile applications and websites and migration of advertising spend online from traditional broadcast and print media.

Costs and Expenses

Cost of Revenue. Our cost of revenue consists of expenses related to operating our mobile applications and websites, including associated headcount expenses, such as salaries and benefits and share-based compensation expense and bonuses. Cost of revenue also includes credit card fees, ad serving costs paid to third parties, revenue-sharing costs related to our commercial business relationships, and data center operations costs.

Sales and Marketing. Sales and marketing expenses consist of advertising costs and other sales expenses related to promotional and marketing activities, as well as headcount expenses, including salaries, commissions, benefits, share-based compensation expense and bonuses for sales, sales support, customer support, marketing and public relations employees.

Technology and Development. Technology and development expenses consist of headcount expenses, including salaries and benefits, share-based compensation expense and bonuses for salaried employees and contractors engaged in the design, development and testing of our mobile applications and websites, equipment and maintenance costs, and facilities costs allocated on a headcount basis. Technology and development expenses also include amortization costs related to capitalized website and development activities, amortization of certain intangibles and other data agreement costs related to the purchase of data used to populate our mobile applications and websites, and amortization of intangible assets recorded in connection with acquisitions.

General and Administrative. General and administrative expenses consist of headcount expenses, including salaries, benefits, share-based compensation expense and bonuses for executive, finance, accounting, legal, human resources, recruiting and administrative support. General and administrative expenses also include legal, accounting and other third-party professional service fees and bad debt expense.

Other Income

Other income consists primarily of interest income earned on our cash, cash equivalents and investments.

Income Taxes

We are subject to federal and state income taxes in the United States. During the three months ended March 31, 2014 and 2013, we did not have reportable taxable income, and we are not projecting reportable taxable income for the year ending December 31, 2014. We have provided a full valuation allowance against our net deferred tax assets as of March 31, 2014 and December 31, 2013 because, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax asset will not be realized. Therefore, no tax liability or expense has been recorded in the financial statements. We have accumulated federal tax losses of approximately $236.5 million as of December 31, 2013, which are available to reduce future taxable income. We have accumulated state tax losses of approximately $6.1 million (tax effected) as of December 31, 2013.

 

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Results of Operations

The following tables present our results of operations for the periods indicated and as a percentage of total revenue:

 

     Three Months Ended March 31,  
     2014     2013  
     (in thousands, except per share data, unaudited)  

Statements of Operations Data:

    

Revenue

   $ 66,243      $ 38,966   

Costs and expenses:

    

Cost of revenue (exclusive of amortization) (1)(2)

     6,164        4,130   

Sales and marketing (1)

     34,898        19,794   

Technology and development (1)

     16,970        10,611   

General and administrative (1)

     14,689        8,233   
  

 

 

   

 

 

 

Total costs and expenses

     72,721        42,768   
  

 

 

   

 

 

 

Loss from operations

     (6,478     (3,802

Other income

     219        55   
  

 

 

   

 

 

 

Net loss

   $ (6,259   $ (3,747
  

 

 

   

 

 

 

Net loss per share — basic and diluted

   $ (0.16   $ (0.11

Weighted-average shares outstanding — basic and diluted

     39,322        33,770   

Other Financial Data:

    

Adjusted EBITDA (3)

   $ 8,728      $ 5,123   

 

     Three Months Ended
March 31,
 
     2014      2013  
     (in thousands, unaudited)  

(1)    Includes share-based compensation as follows:

     

Cost of revenue

   $ 373       $ 163   

Sales and marketing

     1,303         1,227   

Technology and development

     2,025         1,034   

General and administrative

     3,431         1,722   
  

 

 

    

 

 

 

Total

   $ 7,132       $ 4,146   
  

 

 

    

 

 

 

(2)    Amortization of website development costs and intangible assets included in technology and development

   $ 6,784       $ 4,208   

 

 

(3) See “Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP.

 

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Table of Contents
     Three Months Ended
March 31,
 
     2014     2013  
     (unaudited)  

Percentage of Revenue:

    

Revenue

     100     100

Costs and expenses:

    

Cost of revenue (exclusive of amortization)

     9        11   

Sales and marketing

     53        51   

Technology and development

     26        27   

General and administrative

     22        21   
  

 

 

   

 

 

 

Total costs and expenses

     110        110   
  

 

 

   

 

 

 

Loss from operations

     (10     (10

Other income

     0        0   
  

 

 

   

 

 

 

Net loss

     (9 %)      (10 %) 
  

 

 

   

 

 

 

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed Adjusted EBITDA within this Quarterly Report on Form 10-Q, a non-GAAP financial measure. We have provided a reconciliation below of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key metric used by our management and board of directors to measure operating performance and trends and to prepare and approve our annual budget. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

    Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

    Adjusted EBITDA does not consider the potentially dilutive impact of share-based compensation;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; and

 

    Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.

The following table presents a reconciliation of Adjusted EBITDA to net loss for each of the periods presented:

 

     Three Months Ended
March 31,
 
     2014     2013  
     (in thousands, unaudited)  

Reconciliation of Adjusted EBITDA to Net Loss:

    

Net loss

   $ (6,259   $ (3,747

Other income

     (219     (55

Depreciation and amortization expense

     8,074        4,779   

Share-based compensation expense

     7,132        4,146   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 8,728      $ 5,123   
  

 

 

   

 

 

 

 

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Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Revenue

 

     Three Months Ended
March 31,
     2013 to 2014
% Change
 
     2014      2013     
     (in thousands, unaudited)         

Revenue:

        

Marketplace revenue:

        

Real estate

   $ 46,235       $ 26,109         77

Mortgages

     7,128         4,909         45
  

 

 

    

 

 

    

Total Marketplace revenue

     53,363         31,018         72

Display revenue

     12,880         7,948         62
  

 

 

    

 

 

    

Total revenue

   $ 66,243       $ 38,966         70
  

 

 

    

 

 

    

 

     Three Months Ended
March 31,
 
     2014     2013  

Percentage of Total Revenue:

    

Marketplace revenue:

    

Real estate

     70     67

Mortgages

     11     13
  

 

 

   

 

 

 

Total Marketplace revenue

     81     80

Display revenue

     19     20
  

 

 

   

 

 

 

Total revenue

     100     100
  

 

 

   

 

 

 

Overall revenue increased by $27.3 million, or 70%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Marketplace revenue increased by 72%, and display revenue increased by 62%.

Marketplace revenue grew to $53.4 million for the three months ended March 31, 2014 from $31.0 million for the three months ended March 31, 2013, an increase of $22.3 million. Marketplace revenue represented 81% of total revenue for the three months ended March 31, 2014 compared to 80% of total revenue for the three months ended March 31, 2013. The increase in marketplace revenue was primarily attributable to the $20.1 million increase in real estate revenue, which was primarily a result of growth in the number of subscribers in our Premier Agent program to 52,968 as of March 31, 2014 from 34,030 as of March 31, 2013, representing growth of 56%, as well as price increases supported by growth in our audience across our mobile and desktop platforms. Average monthly revenue per subscriber increased by 10% to $286 for the three months ended March 31, 2014 from $259 for the three months ended March 31, 2013. We calculate our average monthly revenue per subscriber by dividing the revenue generated by our Premier Agent subscription products in the period by the average number of Premier Agent subscribers in the period, divided again by the number of months in the period. The average number of Premier Agent subscribers is derived by calculating the average of the beginning and ending number of Premier Agent subscribers for the period. We believe the increase in average monthly revenue per subscriber was primarily driven by increased sales to existing Premier Agent subscribers looking to expand their presence on our platform.

The increase in marketplace revenue was also attributable to growth in mortgages revenue, which increased by $2.2 million, or 45%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The increase in mortgages revenue was primarily a result of an increase in the number of loan requests submitted by consumers in Zillow Mortgage Marketplace. There were approximately 5.8 million mortgage loan requests submitted by consumers for the three months ended March 31, 2014 compared to 4.5 million mortgage loan requests submitted by consumers for the three months ended March 31, 2013, an increase of 29%.

Display revenue was $12.9 million for the three months ended March 31, 2014 compared to $7.9 million for the three months ended March 31, 2013, an increase of $4.9 million. Display revenue represented 19% of total revenue for the three months ended March 31, 2014 compared to 20% of total revenue for the three months ended March 31, 2013. The increase in display revenue was primarily the result of an increase in the number of unique users to our mobile applications and websites, which increased to 70.7 million average monthly unique users for the three months ended March 31, 2014 from 46.7 million average monthly unique users for the three months ended March 31, 2013, representing growth of 51%. The growth in unique users increased the number of graphical display impressions available for sale and advertiser demand for graphical display inventory. Although there is a relationship between the number of average monthly unique users and display revenue, there is not a direct correlation, as the Company does not sell its entire display inventory each period and some of the inventory is sold through networks and not directly through our sales team which impacts the cost per impression we charge to customers.

 

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Cost of Revenue

 

     Three Months Ended
March 31,
     2013 to 2014
% Change
 
     2014      2013     
     (in thousands, unaudited)         

Cost of revenue

   $ 6,164       $ 4,130         49

Cost of revenue was $6.2 million for the three months ended March 31, 2014 compared to $4.1 million for the three months ended March 31, 2013, an increase of $2.0 million, or 49%. The increase in cost of revenue was attributable to increased credit card and ad serving fees of $0.6 million, increased headcount-related expenses of $0.6 million, including share-based compensation expense, driven by growth in headcount, a $0.6 million increase in data center operations and connectivity costs, and a $0.2 million increase in various miscellaneous expenses, including royalties and revenue sharing. We expect our cost of revenue to increase in absolute dollars in future years as we continue to incur more expenses that are associated with growth in revenue.

Sales and Marketing

 

     Three Months Ended
March 31,
     2013 to 2014
% Change
 
     2014      2013     
     (in thousands, unaudited)         

Sales and marketing

   $ 34,898       $ 19,794         76

Sales and marketing expenses were $34.9 million for the three months ended March 31, 2014 compared to $19.8 million for the three months ended March 31, 2013, an increase of $15.1 million, or 76%. The increase in sales and marketing expenses was primarily due to a $9.0 million increase in marketing and advertising expenses, primarily related to advertising spend to acquire shoppers across online and offline channels, which supports our growth initiatives, and a $0.6 million increase in consulting costs to support our marketing and advertising spend. We believe we have considerable opportunity to increase brand awareness and grow traffic through targeted advertising programs. As such, we plan to continue to selectively advertise to consumers and professionals in various online and offline channels that have tested well for us to drive traffic and brand awareness for Zillow.

In addition to the increases in marketing and advertising expense, headcount-related expenses, including share-based compensation expense, increased by $4.6 million, driven primarily by growth in the size of our sales team. We also incurred a $0.4 million increase in tradeshow and conference expenses, including related travel costs, and a $0.5 million increase in various miscellaneous sales and marketing expenses.

We expect our sales and marketing expenses to increase in absolute dollars in future years as we continue to expand our sales team and invest more resources in extending our audience through marketing and advertising initiatives.

Technology and Development

 

     Three Months Ended
March 31,
     2013 to 2014
% Change
 
     2014      2013     
     (in thousands, unaudited)         

Technology and development

   $ 16,970       $ 10,611         60

Technology and development expenses, which include research and development costs, were $17.0 million for the three months ended March 31, 2014 compared to $10.6 million for the three months ended March 31, 2013, an increase of $6.4 million, or 60%. Approximately $2.6 million of the increase was the result of increased amortization of intangible assets, including website development costs, purchased content and acquired intangible assets. Approximately $2.5 million of the increase related to growth in headcount related expenses, including share-based compensation, as we continue to grow our engineering headcount to support current and future product initiatives. The increase in technology and development expenses was also the result of a $0.8 million increase in depreciation expense and software costs, and a $0.5 million increase in various miscellaneous expenses.

Amortization expense included in technology and development for capitalized website development costs was $4.2 million and $2.5 million, respectively, for the three months ended March 31, 2014 and 2013. Amortization expense included in technology and development related to intangible assets recorded in connection with acquisitions was $1.5 million and $1.0 million, respectively, for the three months ended March 31, 2014 and 2013. Amortization expense included in technology and development for purchased data content intangible assets was $1.0 million and $0.7 million, respectively, for the three months ended March 31, 2014 and 2013. Other data content expense was $0.1 million for the three months ended March 31, 2014 and 2013. While we expect our technology and development expenses to increase in absolute dollars over time as we continue to build new mobile and website functionality, we expect these expenses will decrease as a percentage of revenue.

 

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General and Administrative

 

     Three Months Ended
March 31,
     2013 to 2014
% Change
 
     2014      2013     
     (in thousands, unaudited)         

General and administrative

   $ 14,689       $ 8,233         78

General and administrative expenses were $14.7 million for the three months ended March 31, 2014 compared to $8.2 million for the three months ended March 31, 2013, an increase of $6.5 million, or 78%. The increase in general and administrative expenses was a result of a $3.1 million increase in headcount-related expenses, including share-based compensation expense, driven primarily by growth in headcount and increases in compensation, a $1.4 million increase in professional services fees, including legal and accounting, a $0.8 million increase in building lease-related expenses including rent, utilities and insurance, a $0.3 million increase in travel and meals expense, a $0.3 million increase in state and local taxes, a $0.2 million increase in bad debt expense, and a $0.4 million increase in various other miscellaneous expenses. We expect general and administrative expenses to increase over time in absolute dollars as we continue to expand our business.

Liquidity and Capital Resources

As of March 31, 2014 and December 31, 2013, we had cash, cash equivalents and investments of $447.4 million and $437.7 million, respectively. Cash and cash equivalents balances consist of operating cash on deposit with financial institutions, money market funds, municipal securities and certificates of deposit. Investments as of March 31, 2014 and December 31, 2013 consisted of fixed income securities, which include U.S. government agency securities, certificates of deposit, commercial paper, corporate notes and bonds, and municipal securities. Amounts on deposit with third-party financial institutions exceed the applicable Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation insurance limits, as applicable. We believe that cash from operations and cash, cash equivalents and investment balances will be sufficient to meet our ongoing operating activities, working capital, capital expenditures and other capital requirements for at least the next 12 months.

We have executed a standby letter of credit of $1.3 million in connection with the lease of our Seattle, Washington office space, and a standby letter of credit of $0.4 million in connection with the February 2014 lease of our New York, New York office. The letters of credit are secured by our investments and are effective until the expiration dates of the respective leases.

The following table presents selected cash flow data for the three months ended March 31, 2014 and 2013:

 

     Three Months Ended
March 31,
 
     2014     2013  
     (in thousands, unaudited)  

Cash Flow Data:

    

Cash flows provided by operating activities

   $ 14,205      $ 2,289   

Cash flows used in investing activities

     (67,574     (25,438

Cash flows provided by financing activities

     5,263        5,057   

Cash Flows Provided By Operating Activities

For the three months ended March 31, 2014, net cash provided by operating activities was $14.2 million. This was driven by a net loss of $6.3 million, adjusted by depreciation and amortization expense of $8.1 million, share-based compensation expense of $7.1 million, amortization of bond premium of $0.8 million, an increase in the balance of deferred rent of $0.7 million, bad debt expense of $0.6 million, and a loss on disposal of property and equipment of $0.2 million. Changes in operating assets and liabilities increased cash provided by operating activities by $2.9 million.

For the three months ended March 31, 2013, net cash provided by operating activities was $2.3 million. This was primarily driven by a net loss of $3.7 million, adjusted by depreciation and amortization expense of $4.8 million, share-based compensation expense of $4.1 million, loss on disposal of property and equipment of $0.5 million, and bad debt expense of $0.4 million. Changes in operating assets and liabilities decreased cash provided by operating activities by $4.1 million.

 

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Table of Contents

Cash Flows Used In Investing Activities

Our primary investing activities include the purchase and maturity of short-term and long-term investments, including U.S. government agency securities, certificates of deposit, commercial paper, corporate notes and bonds, and municipal securities, as well as the purchase of property and equipment and intangible assets.

For the three months ended March 31, 2014, net cash used in investing activities was $67.6 million. This was the result of $58.6 million of net purchases of investments and $9.0 million of purchases for property and equipment and intangible assets.

For the three months ended March 31, 2013, net cash used in investing activities was $25.4 million. This was the result of $18.8 million of net purchases of investments and $6.6 million of purchases for property and equipment and intangible assets.

Cash Flows Provided By Financing Activities

For the three months ended March 31, 2014 and 2013, our financing activities resulted entirely from the exercise of employee stock options. The proceeds from the issuance of Class A common stock from the exercise of stock options for the three months ended March 31, 2014 and 2013 was $5.3 million and $5.1 million, respectively.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2014.

Contractual Obligations

The following table provides a summary of our contractual obligations as of March 31, 2014:

 

     Payment Due By Period  
     Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 
     (in thousands, unaudited)  

Operating lease obligations

   $ 72,846       $ 6,484       $ 16,496       $ 18,367       $ 31,499   

Purchase obligations

     12,569         4,580         7,522         467         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 85,415       $ 11,064       $ 24,018       $ 18,834       $ 31,499   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our operating lease obligations consist of various operating leases for office space and equipment. For further discussion of our operating lease obligations, see Note 10 in Part I, Item 1 (Notes to Condensed Financial Statements). We also have purchase obligations for content related to our mobile applications and websites.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. For information on our critical accounting policies and estimates, see Part II, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no material changes to our critical accounting policies and estimates as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

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Item  3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see Part 2, Item 7A (Quantitative and Qualitative Disclosures About Market Risk) in our Annual Report on Form 10-K for the year ended December 31, 2013. Our exposures to market risk have not changed materially since December 31, 2013.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of March 31, 2014. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective as of March 31, 2014.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

In March 2010, Smarter Agent, LLC (“Smarter Agent”) filed a complaint against us and multiple other defendants, including HotPads, Inc. (“HotPads”), for patent infringement in the U.S. District Court for the District of Delaware. The complaint alleges, among other things, that our mobile technology infringes three patents held by Smarter Agent purporting to cover: a “Global positioning-based real estate database access device and method,” a “Position-based information access device and method” and a “Position-based information access device and method of searching,” and seeks an injunction against the alleged infringing activities and an unspecified award for damages. In November 2010, the U.S. Patent and Trademark Office granted our petition for re-examination of the three patents-in-suit, and to date, all claims of all three patents remain rejected in the re-examination proceedings. In March 2011, the court granted a stay of the litigation pending the completion of the re-examination proceedings. In addition, in October 2011, Smarter Agent filed a substantially similar complaint against Diverse Solutions, Inc. (“Diverse Solutions”), StreetEasy, Inc. (“StreetEasy”) and other defendants, for patent infringement in the U.S. District Court for the District of Delaware. On October 31, 2011, we acquired substantially all of the operating assets and certain liabilities of Diverse Solutions, and took responsibility for the Smarter Agent complaint against Diverse Solutions. On August 26, 2013, we acquired StreetEasy, and took responsibility for the Smarter Agent complaint against StreetEasy. On December 14, 2012, we acquired HotPads, including the Smarter Agent complaint against HotPads.

In September 2010, LendingTree, LLC (“LendingTree”) filed a complaint against us for patent infringement in the U.S. District Court for the Western District of North Carolina. The complaint alleged, among other things, that our website technology infringes two patents purporting to cover a “Method and computer network for coordinating a loan over the internet.” The complaint sought, among other things, a judgment that we infringed certain patents held by LendingTree, an injunction against the alleged infringing activities and an award for damages. We denied the allegations and asserted defenses and counterclaims seeking declarations that we are not infringing the patents and that the patents are invalid. On March 12, 2014, a federal jury found that Zillow does not infringe the patents and that the patents asserted by LendingTree are invalid.

In November 2012, a securities class action lawsuit was filed in the U.S. District Court for the Western District of Washington at Seattle against us and certain of our executive officers seeking unspecified damages. A consolidated amended complaint was filed in June 2013. The complaint purports to state claims for violations of federal securities laws on behalf of a class of those who purchased our common stock between February 15, 2012 and November 6, 2012. The complaint generally alleges, among other things, that during the period between February 15, 2012 and November 6, 2012, we issued materially false and misleading statements regarding our business practices and financial results. In August 2013, we moved to dismiss the lawsuit. That motion to dismiss has been fully briefed and is pending before the Court. We have denied the allegations of wrongdoing, and we will continue to vigorously defend the claims in the lawsuit.

In March 2014, Move, Inc., the National Association of Realtors and three related entities, filed a complaint against us and Errol Samuelson, our Chief Industry Development Officer, in the Superior Court of the State of Washington in King County, alleging, among other things, that Zillow and Mr. Samuelson misappropriated plaintiffs’ trade secrets in connection with Mr. Samuelson joining Zillow in March 2014. The complaint seeks, among other things, an injunction against the alleged misappropriations and Mr. Samuelson working for us, as well as unspecified damages. In April 2014, the court denied the plaintiffs’ motion for a preliminary injunction prohibiting Mr. Samuelson from working for us. Plaintiffs renewed their motion for a preliminary injunction and that motion is pending. We have denied the allegations of any wrongdoing and intend to vigorously defend the claims in the lawsuit.

Although the results of litigation cannot be predicted with certainty, we currently believe we have substantial and meritorious defenses to the outstanding claims and that the final outcome of the outstanding litigation matters will not have a material effect on our business, financial position, results of operations or cash flow.

From time to time, we are involved in litigation and claims that arise in the ordinary course of business and although we cannot be certain of the outcome of any such litigation or claims, nor the amount of damages and exposure that we could incur, we currently believe that the final disposition of such matters will not have a material effect on our business, financial position, results of operations or cash flow. 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 1A. Risk Factors

There have not been any material changes to the risk factors affecting our business, financial condition or future results from those set forth in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the year ended December 31, 2013. However, you should carefully consider the factors discussed in our Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

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Item 2. Unre gistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

On February 19, 2014, in connection with a sponsorship agreement involving an equity-based payment to a non-employee recipient, we issued 3,255 restricted shares of our Class A common stock to the recipient. This transaction was exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act and Regulation D promulgated thereunder. The recipient of restricted shares of our Class A common stock in this transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions. The recipient had adequate access, through their relationships with us, to information about Zillow.

There were no other sales of unregistered securities during the three months ended March 31, 2014.

 

Item 4. Mine S afety Disclosures

Not applicable.

 

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Item 6. Exhibits

The exhibits listed below are filed as part of this Quarterly Report on Form 10-Q.

 

Exhibit

Number

  

Description

  10.1*    Amended and Restated Executive Employment Agreement by and between Errol Samuelson and Zillow, Inc.
  10.2*    Form of Restricted Stock Unit Award Notice and Restricted Stock Unit Award Agreement under the Zillow, Inc. Amended and Restated 2011 Incentive Plan.
  10.3*    Form of Restricted Unit Award Notice and Restricted Unit Award Agreement under the Zillow, Inc. Amended and Restated 2011 Incentive Plan.
  10.4*    Form of Confidential Information, Inventions, and Nonsolicitation Agreement for certain officers of Zillow, Inc.
  10.5    Third Amendment to Lease by and between FSP-RIC, LLC and Zillow, Inc., dated as of January 10, 2014 (Filed as Exhibit 10.10 to Registrant’s Form 10-K filed with the Securities and Exchange Commission on February 18, 2014, and incorporated herein by reference).
  31.1    Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of 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    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Indicates a management contract or compensatory plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: May 8, 2014     ZILLOW, INC.
    By:  

/s/ C HAD M. C OHEN

    Name: Chad M. Cohen
    Title:   Chief Financial Officer and Treasurer

 

29

Exhibit 10.1

AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT

This Amended and Restated Executive Employment Agreement (“ Agreement ”) is entered into as of April 2, 2014 by and between Errol Samuelson (“ Executive ”) and Zillow, Inc., a Washington corporation (the “ Company ”).

RECITALS

WHEREAS, as of March 5, 2014 (the “ Effective Date ”), Executive and the Company entered into an Executive Employment Agreement (the “ Original Agreement ”) regarding the employment of Executive by the Company as its Chief Industry Development Officer;

WHEREAS, Executive and the Company wish to amend Section 2.3(b) of the Original Agreement to provide that the number of shares of the Company’s Class A common stock to be delivered upon vesting of the Annual Restricted Units (as defined herein) shall be determined by dividing the number of Annual Restricted Units by the closing price of the Company’s Class A common stock during regular session trading as of the trading date immediately preceding the applicable vesting date of the Annual Restricted Units; and

WHEREAS, pursuant to Section 5 of the Original Agreement, Executive and the Company wish to amend and restate the Original Agreement to read as set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and promises described below, the Original Agreement is hereby amended and restated to read in its entirety, and Executive and the Company agree, as follows:

Certain capitalized terms in this Agreement have the meanings set forth in Appendix A attached to this Agreement, which is incorporated into this Agreement in its entirety.


1. EMPLOYMENT

The Company agrees to employ Executive, and Executive agrees to accept employment by the Company as its Chief Industry Development Officer and report to the Company’s Chief Executive Officer. Executive’s employment with the Company will commence on the business day following issuance to Executive of a United States work visa that authorizes Executive to provide the services contemplated hereunder for a period of no less than twelve (12) months from the date of issuance of the visa. Company and Executive agree to cooperate and expend best efforts to obtain such a visa as soon as practicable following Executive’s execution of this Agreement. Company will provide Executive with legal representation in connection with Executive’s application for such visa at Company’s expense. In the event the Executive is not able to secure a United States work visa, the Executive and the Company will engage in their commercially reasonable best efforts to seek alternative employment or other contractual arrangements to satisfy the terms of the Agreement. Company and Executive agree that Executive will continue to live in Vancouver, Canada, but that Executive will agree to (1) travel to the Company’s headquarters in Seattle and (2) travel to other United States locations on Company business, in each case as the CEO deems necessary for Executive to perform his duties hereunder. Subject to Sections 3.3 and 3.4, changes may be made from time to time by the Company in its sole discretion to the duties, reporting relationships and title of Executive. Executive will perform the duties as are commensurate and consistent with Executive’s position and will devote Executive’s full working time, attention and efforts to the Company and to discharging the responsibilities of Executive’s position, and such other duties as may be assigned from time to time by the Company, which relate to the business of the Company and are reasonably consistent with Executive’s position. Executive will not have signature authority on

 

- 2 -


the Company’s behalf and will not have authority to bind the Company to any contract obligation. Executive will provide his own working space, computer(s), communication devices, internet and telephone services and other facilities and services in Canada that are reasonably necessary for him to perform his duties. During Executive’s employment, Executive will not engage in any business activity that, in the reasonable judgment of the Chief Executive Officer, conflicts with the duties of Executive under this Agreement, whether or not such activity is pursued for gain, profit or other advantage. Executive agrees to comply with the Company’s standard policies and procedures, his Confidential Information, Inventions and Nonsolicitation Agreement and Indemnification Agreement, each to be executed by Executive contemporaneously with this Agreement, and with all applicable laws and regulations.

 

2. COMPENSATION AND BENEFITS

The Company agrees to pay or cause to be paid to Executive and Executive agrees to accept in exchange for the services rendered hereunder the following compensation and benefits:

 

  2.1 Signing Bonus

Executive will received a signing bonus of $395,000 (USD), payable as follows:

 

    $200,000 (USD) paid on the next regular payroll date following the start of his employment; and

 

    $195,000 (USD) on the next regular payroll date following the completion of 90 days of employment, provided, however, that Executive remains employed by the Company on that payroll date.

The bonus payments will be subject to normal payroll taxes and withholding.

 

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  2.2 Annual Salary

Executive’s compensation shall consist of an annual base salary (the “ Salary ”) of $350,000 (USD), payable in semi-monthly installments in accordance with the payroll practices of the Company. The Salary shall be reviewed, and shall be subject to change, by the Board of Directors (or the Compensation Committee thereof) at least annually while Executive is employed hereunder.

 

  2.3 Bonus And Equity Awards

Executive shall be eligible to participate in the Company’s incentive bonus plans as may be adopted from time to time by the Board of Directors (or the Compensation Committee thereof), subject to and in accordance with the terms and conditions of such plans. In connection with commencement of employment, Executive shall be eligible to receive the following equity awards (“ Equity Awards ”):

(a) Initial grant of restricted stock units (“ Initial RSUs ”) for that number of shares of Class A common stock of the Company equal to $5 million (USD) in value, based on the Company’s sixty (60) day average stock price immediately preceding the Effective Date of this Agreement, which Initial RSUs shall vest quarterly over four years from Executive’s first day of employment with the Company, subject to Executive’s continued employment on each vesting date.

(b) Annual grant of 345,000 Restricted Units (“ Annual Restricted Units ”), whereby each Annual Restricted Unit has an initial value of one U.S. dollar (U.S. $1.00) as of the date of grant and represents the right to receive shares of the Company’s Class A common stock on or

 

- 4 -


following the applicable anniversary of Executive’s first day of employment with the Company (such that the grant of Annual Restricted Units approved in 2014 shall vest on the one-year anniversary of Executive’s first day of employment and subsequent grants of Annual Restricted Units shall vest on each successive anniversary of Executive’s first day of employment), such number of shares to be determined by dividing the number of Annual Restricted Units by the closing price of the Company’s Class A common stock during regular session trading as of the trading date immediately preceding the applicable vesting date of such Annual Restricted Units. Upon vesting, the Annual Restricted Units will be settled in shares of Class A common stock. The grant of Annual Restricted Units approved in 2014 will be subject to Executive’s employment on the grant date and, for each grant of Annual Restricted Units approved thereafter, continued employment through the applicable grant date, and vesting of Annual Restricted Units will be subject to Executive’s continued employment on the applicable vesting date.

(c) All settlement of the Equity Awards in shares of Class A common stock of the Company shall be subject to normal payroll taxes and withholding. The Annual Restricted Units and Initial RSUs shall be subject to the terms and conditions of the Company’s Amended and Restated 2011 Incentive Plan or any successor plan thereto and shall be further subject to the terms of an Unit Grant Notice, Restricted Unit Agreement, Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement that shall be provided to Executive to evidence the Annual Restricted Units and Initial RSUs.

 

  2.4 Benefits

Executive shall be eligible to participate, subject to and in accordance with applicable eligibility requirements, in such employee benefit plans, policies, programs and arrangements as

 

- 5 -


are generally provided to the Company’s other similarly situated executives, which shall include, at a minimum, basic health, disability, life, dental and vision insurance. In the event Executive does not meet eligibility requirements due to his Canadian citizenship and residency, Company agrees to provide individual coverage that is reasonably equivalent to what he would have received under the group plans.

 

  2.5 Vacation and Other Paid Time-Off Benefits

Each calendar year, Executive shall be entitled to that number of weeks of paid vacation per year equal to those provided to similarly situated executives of the Company, in accordance with the plans, policies, programs and arrangements of the Company applicable to similarly situated executives of the Company generally. Executive also shall be provided such holidays and sick leave as the Company makes available to all of its other employees.

 

3. TERMINATION

 

  3.1 General

Except as expressly provided for in this Agreement, upon any termination of employment, Executive shall not be entitled to receive any payments or benefits under this Agreement other than unpaid Salary earned through the date of termination and unused vacation that has accrued as of the date of Executive’s termination of employment that would be payable under the Company’s standard policy.

 

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  3.2 Automatic Termination on Death or Total Disability

This Agreement and Executive’s employment hereunder shall terminate automatically upon the death or Total Disability of Executive. “ Total Disability ” shall mean Executive’s inability, with reasonable accommodation, to perform the duties of Executive’s position for a period or periods aggregating ninety (90) days in any period of one hundred eighty (180) consecutive days as a result of physical or mental illness, loss of legal capacity or any other cause beyond Executive’s control. Executive and the Company hereby acknowledge that Executive’s ability to perform Executive’s duties is the essence of this Agreement. Termination hereunder shall be deemed to be effective (a) at the end of the calendar month in which Executive’s death occurs or (b) immediately upon a determination by the Board of Directors (or the Compensation Committee thereof) of Executive’s Total Disability. In the case of termination of employment under this Section 3.2, Executive shall not be entitled to receive any payments or benefits under this Agreement other than unpaid Salary earned through the date of termination and unused vacation that has accrued as of the date of Executive’s termination of employment that would be payable under the Company’s standard policy; provided, however, that Executive shall be entitled to full acceleration of vesting of any Initial RSUs (as defined in Section 2.3) that remain unvested as of the date of Executive’s termination of employment by reason of death or Total Disability.

 

  3.3 Termination of Employment Without Cause or for Good Reason, Other Than in Connection with a Change of Control

(a) If (1) the Company terminates Executive’s employment without Cause (as defined in Appendix A ), or (2) Executive resigns for Good Reason (as defined in Appendix A ), then

 

- 7 -


Executive shall be entitled to receive the following termination payments and benefits; provided, however, that this Section 3.3 shall not apply to, and shall have no effect in connection with, any termination to which Section 3.2 or Section 3.4 of this Agreement applies:

(i) an amount equal to the greater of (i) twelve (12) months’ Salary, at the rate in effect immediately prior to termination, or (ii) $350,000 (USD), payable to Executive in accordance with the terms below (“ Severance Payments ”);

(ii) unpaid Salary earned through the date of termination and unused vacation that has accrued and would be payable under the Company’s standard policy (collectively, the “ Accrued Obligations ”), payable in a lump sum on the next regularly scheduled payroll date following the date on which Executive’s employment terminated;

(iii) benefits continuation coverage paid in full by the Company, so long as Executive has not become actually covered by the medical plan of a subsequent employer during any such month and is otherwise entitled to benefits continuation coverage, with such payments for up to a maximum of twelve (12) months following the date of termination. After such period, Executive is responsible for paying the full cost for any additional benefits continuation coverage to which Executive is then entitled; and

(iv) accelerated vesting by an additional twenty-four (24) months of Executive’s then unvested Initial RSUs and any outstanding and unvested Annual Restricted Units.

(b) As a condition to receiving the payments and benefits under this Section 3.3 other than the Accrued Obligations, Executive shall execute (and not revoke within the applicable revocation period) a general release and waiver of all claims against the Company, which release

 

- 8 -


and waiver shall be in a form acceptable to the Company, and in substantially the form attached hereto as Appendix B . Such release and waiver shall be delivered to the Company no later than the date specified by the Company (which date shall in no event be later than twenty-one (21) days or forty-five (45) days, as applicable, after the date on which Executive is presented with the terms of the release and waiver). In addition, payment of the amounts and benefits under this Section 3.3 are contingent on Executive’s full and continued compliance with the Company’s Confidential Information, Inventions and Nonsolicitation Agreement, as the same may be amended from time to time.

(c) Notwithstanding the foregoing, termination of employment by Executive will not be for Good Reason unless (1) Executive notifies the Company in writing of the existence of the condition which Executive believes constitutes Good Reason within thirty (30) days of the initial existence of such condition (which notice specifically identifies such condition), (2) the Company fails to remedy such condition within thirty (30) days after the date on which it receives such notice (the “ Remedial Period ”), and (3) Executive actually terminates employment within thirty (30) days after the expiration of the Remedial Period and before the Company remedies such condition. If Executive terminates employment before the expiration of the Remedial Period or after the Company remedies the condition (even if after the end of the Remedial Period), then Executive’s termination will not be considered to be for Good Reason.

(d) Subject to Section 3.3(b), Severance Payments under Section 3.3(a)(i) shall be paid to Executive through the Company’s normally scheduled payroll during the twelve (12) month period commencing within sixty (60) days following the date on which Executive’s employment was terminated without Cause or Executive resigned for Good Reason; provided, however, that in the event such sixty (60) day period begins in one taxable year of Executive and

 

- 9 -


ends in a second taxable year of Executive, the Company shall not make any Severance Payments to Executive until the second taxable year. Each such payment shall be treated as a separate payment for purposes of Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”), including the rules and regulations thereunder (“ Code Section 409A ”). Notwithstanding the foregoing, if any payments and benefits payable pursuant to Section 3.3(a) constitute a “deferral of compensation” subject to Code Section 409A (after taking into account, to the maximum extent possible, any applicable exemptions), then the applicable provisions of Section 13 hereof shall apply.

 

  3.4 Termination of Employment in Connection with a Change of Control

 

  3.4.1 Benefits for Qualified Terminations in Connection with a Change of Control

(a) If (1) during the period commencing on the date the Company enters into a definitive agreement with respect to a transaction that would constitute a Change of Control (as defined in Appendix A ) and ending on the date the definitive agreement therefor is terminated or the Change of Control is consummated, the Company terminates Executive’s employment without Cause (as defined in Appendix A ), (2) during the period commencing upon the consummation of the Change of Control and ending eighteen (18) months thereafter, the Company or, if applicable, the surviving or successor employer (“ Successor Employer ”) terminates Executive’s employment without Cause (as defined in Appendix A ), or (3) during the period commencing upon the consummation of the Change of Control and ending eighteen (18) months thereafter, Executive resigns for Good Reason (as defined in Appendix A ), then Executive shall be entitled to receive the following termination payments and benefits and shall not also be eligible to receive the payments and benefits under Section 3.3:

(i) an amount equal to the greater of (i) $350,000 (USD) or (ii) twelve (12) months’ Salary, measured as the higher of the Salary in effect immediately prior to the Change of Control or the Salary in effect immediately prior to termination, payable to Executive in accordance with the terms below (“ CIC Severance Payments ”);

 

- 10 -


(ii) Accrued Obligations, payable in a lump sum on the next regularly scheduled payroll date following the date on which Executive’s employment terminated;

(iii) benefits continuation coverage paid in full by the Company, so long as Executive has not become actually covered by the medical plan of a subsequent employer during any such month and is otherwise entitled to benefits continuation coverage, with such payments for up to a maximum of six (6) months following the date of termination. After such period, Executive is responsible for paying the full cost for any additional benefits continuation coverage to which Executive is then entitled; and

(iv) full acceleration of vesting of any Initial RSUs and Annual Restricted Units that remain outstanding and unvested on the date of Executive’s termination of employment, including equity awards issued in substitution or replacement of such Initial RSUs and Annual Restricted Units in connection with the Change of Control. Notwithstanding the foregoing, to the extent any agreement evidencing the Initial RSUs or Annual Restricted Units contain terms that provide for greater acceleration of vesting than that set forth in this paragraph, the terms of such agreement shall continue to govern.

 

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(b) As a condition to receiving the payments and benefits under this Section 3.4.1 other than the Accrued Obligations, Executive shall execute (and not revoke within the applicable revocation period) a general release and waiver of all claims against the Company, which release and waiver shall be in a form acceptable to the Company (including any Successor Employer thereto), and in substantially the form attached hereto as Appendix B . Such release and waiver shall be delivered to the Company (or any Successor Employer thereto) no later than the date specified by the Company (or any Successor Employer thereto) (which date shall in no event be later than twenty-one (21) days or forty-five (45) days, as applicable, after the date on which Executive is presented with the terms of the release and waiver). In addition, payment of the amounts and benefits under this Section 3.4.1 are contingent on Executive’s full and continued compliance with the Company’s Confidential Information, Inventions and Nonsolicitation Agreement, as the same may be amended from time to time.

(c) Notwithstanding the foregoing, termination of employment by Executive will not be for Good Reason unless (1) Executive notifies the Company (or a Successor Employer thereto) in writing of the existence of the condition which Executive believes constitutes Good Reason within thirty (30) days of the initial existence of such condition (which notice specifically identifies such condition), (2) the Company (or a Successor Employer thereto) fails to remedy such condition within thirty (30) days after the date on which it receives such notice (the “ Remedial Period ”), and (3) Executive actually terminates employment within thirty (30) days after the expiration of the Remedial Period and before the Company (or a Successor Employer thereto) remedies such condition. If Executive terminates employment before the expiration of the Remedial Period or after the Company (or a Successor Employer thereto) remedies the condition (even if after the end of the Remedial Period), then Executive’s termination will not be considered to be for Good Reason.

 

- 12 -


(d) Subject to Section 3.4.1(b), the CIC Severance Payments under Section 3.4.1(a) shall be paid to Executive through the Company’s (or the Successor Employer’s) normally scheduled payroll during the six (6) month period commencing within sixty (60) days following the date on which Executive’s employment was terminated without Cause or Executive resigned for Good Reason; provided, however, that in the event such sixty (60) day period begins in one taxable year of Executive and ends in a second taxable year of Executive, the Company will not make any CIC Severance Payments to Executive until the second taxable year. Each such payment shall be treated as a separate payment for purposes of Code Section 409A. Notwithstanding the foregoing, if any payments and benefits payable pursuant to Section 3.4.1(a) constitute a “deferral of compensation” subject to Code Section 409A (after taking into account, to the maximum extent possible, any applicable exemptions), then the applicable provisions of Section 13 hereof shall apply.

 

  3.4.2 Code Section 280G

(a) Notwithstanding anything in this Agreement to the contrary, in the event that Executive becomes entitled to receive or receives any payment or benefit under this Agreement or under any other plan, agreement or arrangement with the Company, or from any person whose actions result in a Change of Control or any other person affiliated with the Company or such person (all such payments and benefits being referred to herein as the “ Total Payments ”) and it is determined that any of the Total Payments will be subject to any excise tax pursuant to Code Section 4999, or any similar or successor provision (the “ Excise Tax ”), the Company shall pay

 

- 13 -


to Executive either (1) the full amount of the Total Payments or (2) an amount equal to the Total Payments, reduced by the minimum amount necessary to prevent any portion of the Total Payments from being an “excess parachute payment” (within the meaning of Code Section 280G) (the “ Capped Payments ”), whichever of the foregoing amounts results in the receipt by Executive, on an after-tax basis, of the greatest amount of Total Payments notwithstanding that all or some portion of the Total Payments may be subject to the Excise Tax. For purposes of determining whether Executive would receive a greater after-tax benefit from the Capped Payments than from receipt of the full amount of the Total Payments, (i) there shall be taken into account any Excise Tax and all applicable federal, state and local taxes required to be paid by Executive in respect of the receipt of such payments and (ii) such payments shall be deemed to be subject to federal income taxes at the highest rate of federal income taxation applicable to individuals that is in effect for the calendar year in which the effective date of the Change of Control occurs, and state and local income taxes at the highest rate of taxation applicable to individuals in the state and locality of Executive’s residence on the effective date of the Change of Control, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes (as determined by assuming that such deduction is subject to the maximum limitation applicable to itemized deductions under Code Section 68 and any other limitations applicable to the deduction of state and local income taxes under the Code).

(b) All computations and determinations called for by this Section 3.4.2 shall be made by a reputable independent public accounting firm or independent tax counsel appointed by the Company (the “ Firm ”). All determinations made by the Firm under this Section 3.4.2 shall be conclusive and binding on both the Company and Executive, and the Firm shall provide its determinations and any supporting calculations to the Company and Executive within ten (10)

 

- 14 -


business days after Executive’s employment terminates under any of the circumstances described in Section 3.4.1, or such earlier time as is requested by the Company. For purposes of making its determinations under this Section 3.4.2, the Firm may rely on reasonable, good faith interpretations concerning the application of Code Sections 280G and 4999. The Company and Executive shall furnish to the Firm such information and documents as the Firm may reasonably request in making its determinations. The Company shall bear all fees and expenses charged by the Firm in connection with its services.

(c) In the event that Section 3.4.2(a) applies and a reduction is required to be applied to the Total Payments thereunder, the Total Payments shall be reduced by the Company in its reasonable discretion in the following order: (1) reduction of any Total Payments that are subject to Code Section 409A on a pro-rata basis or such other manner that complies with Code Section 409A, as determined by the Company, and (2) reduction of any Total Payments that are exempt from Code Section 409A.

 

4. ASSIGNMENT

This Agreement is personal to Executive and shall not be assignable by Executive. The Company may assign its rights hereunder to (a) any Successor Employer; (b) any other corporation resulting from any merger, consolidation or other reorganization to which the Company is a party; (c) any other corporation, partnership, association or other person to which the Company may transfer all or substantially all of the assets and business of the Company existing at such time; or (d) any subsidiary, parent or other affiliate of the Company. All of the terms and provisions of this Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns.

 

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5. AMENDMENTS IN WRITING

No amendment, modification, waiver, termination or discharge of any provision of this Agreement, or consent to any departure therefrom by either party hereto, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated or discharged and signed by the Company and Executive, and each such amendment, modification, waiver, termination or discharge shall be effective only in the specific instance and for the specific purpose for which given. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by the Company and Executive.

 

6. NOTICES

Every notice relating to this Agreement shall be in writing and shall be given by personal delivery, by a reputable same-day or overnight courier service (charges prepaid), by registered or certified mail (postage prepaid, return receipt requested) or by facsimile to the recipient with a confirmation copy to follow the next day to be delivered by personal delivery or by a reputable same-day or overnight courier service to the appropriate party’s address or email address below (or such other address and email address as a party may designate by notice to the other parties):

 

If to the Company:    Zillow, Inc.
   1301 Second Avenue, Floor 31
   Seattle, Washington 98101
   Email: legal@zillow.com
   Attn: Legal Department
If to the Executive:   
  
  
  

 

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7. APPLICABLE LAW

This Agreement shall in all respects, including all matters of construction, validity and performance, be governed by, and construed and enforced in accordance with, the laws of the State of Washington, without regard to any rules governing conflicts of laws.

 

8. ENTIRE AGREEMENT

This Agreement constitutes the entire agreement between the Company and Executive with respect to the subject matter hereof, and all prior or contemporaneous oral or written communications, understandings or agreements between the Company and Executive with respect to such subject matter are hereby superseded in their entirety, except as otherwise provided herein.

 

9. SEVERABILITY

If any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

 

10. WAIVERS

No delay or failure by any party hereto in exercising, protecting, or enforcing any of its rights, titles, interests, or remedies hereunder, and no course of dealing or performance with respect thereto, shall constitute a waiver thereof. The express waiver by a party hereto of any

 

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right, title, interest, or remedy in a particular instance or circumstance shall not constitute a waiver thereof in any other instance or circumstance. All rights and remedies shall be cumulative and not exclusive of any other rights or remedies.

 

11. HEADINGS

All headings used herein are for convenience only and shall not in any way affect the construction of, or be taken into consideration in interpreting, this Agreement.

 

12. COUNTERPARTS

This Agreement, and any amendment or modification entered into pursuant to Section 5 hereof, may be executed in any number of counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute one and the same instrument.

 

13. CODE SECTION 409A

The Company makes no representations or warranties to Executive with respect to any tax, economic or legal consequences of this Agreement or any payments or other benefits provided hereunder, including without limitation under Code Section 409A, and no provision of this Agreement shall be interpreted or construed to transfer any liability for failure to comply with Code Section 409A from Executive or any other individual to the Company or any of its affiliates. Executive, by executing this Agreement, shall be deemed to have waived any claim against the Company and its affiliates with respect to any such tax, economic or legal consequences. However, the parties intend that this Agreement and the payments and benefits provided hereunder be exempt from the requirements of Code Section 409A, and the rules and

 

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regulations issued thereunder, to the maximum extent possible, whether pursuant to the short-term deferral exception described in Treasury Regulation Section 1.409A-1(b)(4), the involuntary separation pay plan exception described in Treasury Regulation Section 1.409A-1(b)(9)(iii), or otherwise. To the extent Code Section 409A is applicable to this Agreement, the parties intend that this Agreement and any payments and benefits hereunder comply with the deferral, payout and other limitations and restrictions imposed under Code Section 409A so as to avoid the imputation of any tax, penalty or interest under Code Section 409A. Notwithstanding anything herein to the contrary, this Agreement shall be construed, interpreted, operated and administered in a manner consistent with such intentions. Without limiting the generality of the foregoing, and notwithstanding any other provision of this Agreement to the contrary:

(a) To the extent Code Section 409A is applicable to this Agreement, a termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of amounts or benefits upon or following a termination of employment unless such termination constitutes a “separation from service” within the meaning of Treasury Regulation Section 1.409A-1(h)(1), without regard to the optional alternative definitions available thereunder (a “ Separation from Service ”), and, for purposes of any such provision of this Agreement, references to “terminate,” “termination,” “termination of employment,” “resigns” and like terms shall mean Separation from Service.

(b) If Executive is a “specified employee” within the meaning of Treasury Regulation Section 1.409A-1(i) as of the date of Executive’s Separation from Service, Executive shall not be entitled to any payment or benefit on account of Executive’s Separation from Service, until the earlier of (1) the date which is six (6) months after Executive’s Separation from Service for any reason other than death or (2) the date of Executive’s death. The provisions of this paragraph

 

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shall only apply if, and to the extent, required to avoid the imputation of any tax, penalty or interest pursuant to Code Section 409A on Executive. Any amounts otherwise payable to Executive upon or in the six (6) month period following Executive’s Separation from Service that are not so paid by reason of this Section 13(b) shall be paid (without interest) as soon as practicable (and in all events within thirty (30) days) after the date that is six (6) months after Executive’s Separation from Service (or, if earlier, as soon as practicable, and in all events within thirty (30) days, after the date of Executive’s death).

(c) With regard to any provision in this Agreement that provides for reimbursement of expenses or in-kind benefits (except for any expense, reimbursement or in-kind benefit provided pursuant to this Agreement that does not constitute a “deferral of compensation,” within the meaning of Treasury Regulation Section 1.409A-1(b)), (i) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during any calendar year shall not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other calendar year, (ii) such payment shall be made within thirty (30) days following the submission of appropriate documentation required by the Company and in no event later than the last day of the calendar year following the calendar year in which the expense was incurred, and (iii) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit.

[Signature Page Follows]

 

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IN WITNESS WHEREOF , the parties have executed and entered into this Agreement effective on the date first set forth above.

 

ERROL SAMUELSON

/s/ ERROL SAMUELSON

ZILLOW, INC.
By  

/s/ SPENCER M. RASCOFF

Its  

Chief Executive Officer

 

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APPENDIX A

DEFINITIONS

Capitalized terms used below that are not defined in this Appendix A have the meanings set forth in the Executive Employment Agreement (“ Agreement ”) to which this Appendix A is attached. As used in the Agreement.

1. Cause ” means the occurrence of one or more of the following events:

(a) willful misconduct, insubordination or dishonesty in the performance of Executive’s duties or a knowing and material violation of the Company’s or the Successor Employer’s policies and procedures in effect from time to time which results in a material adverse effect on the Company or the Successor Employer;

(b) the continued failure of Executive to satisfactorily perform his duties after receipt of written notice that identifies the areas in which Executive’s performance is deficient;

(c) willful actions in bad faith or intentional failures to act in good faith by Executive with respect to the Company or the Successor Employer that materially impair the Company’s or the Successor Employer’s business, goodwill or reputation;

(d) conviction of Executive of a felony or misdemeanor, conduct by Executive that the Company reasonably believes violates any statute, rule or regulation governing the Company, or conduct by Executive that the Company reasonably believes constitutes unethical practices, dishonesty or disloyalty and that results in a material adverse effect on the Company or the Successor Employer;


(e) current use by Executive of illegal substances; or

(f) any material violation by Executive of this Agreement or the Company’s Confidential Information, Inventions and Nonsolicitation Agreement.

2. Change of Control ” means the occurrence of any of the following events:

(a) an acquisition by any Entity of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “ Outstanding Company Voting Securities ”); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege where the security being so converted was not acquired directly from the Company by the party exercising the conversion privilege, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Related Company, (iv) any acquisition by a Founder Shareholder, provided that this clause (iv) shall terminate and be of no effect with respect to a Founder Shareholder at such time as such Founder Shareholder’s beneficial ownership of the Outstanding Company Voting Securities is less than 25%, or (v) any acquisition by any Entity pursuant to a transaction that meets the conditions of clauses (i), (ii) and (iii) set forth in the definition of Company Transaction;

(b) a change in the composition of the Board of Directors of the Company during any two-year period such that the individuals who, as of the beginning of such two-year period, constitute the Board (the “ Incumbent Board ”) cease for any reason to constitute at least a majority of the Board; provided, however, that for purposes of this definition, any individual


who becomes a member of the Board subsequent to the beginning of the two-year period, whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided further, however, that any such individual whose initial assumption of office occurs as a result of or in connection with an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of an Entity other than the Board shall not be considered a member of the Incumbent Board; or

(c) the consummation of a Company Transaction.

3. Company Transaction ” means consummation of:

(a) a merger or consolidation of the Company with or into any other company;

(b) a statutory share exchange pursuant to which all of the Company’s outstanding shares are acquired or a sale in one transaction or a series of transactions undertaken with a common purpose of all of the Company’s outstanding voting securities; or

(c) a sale, lease, exchange or other transfer in one transaction or a series of related transactions undertaken with a common purpose of all or substantially all of the Company’s assets,

excluding, however, in each case, any such transaction pursuant to which


(i) the Entities who are the beneficial owners of the Outstanding Company Voting Securities immediately prior to such transaction will beneficially own, directly or indirectly, at least 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the Successor Company in substantially the same proportions as their ownership, immediately prior to such transaction, of the Outstanding Company Voting Securities;

(ii) no Entity (other than the Company, any employee benefit plan (or related trust) of the Company, a Related Company or a Successor Company) will beneficially own, directly or indirectly, more than 50% of the combined voting power of the outstanding voting securities of the Successor Company entitled to vote generally in the election of directors unless such ownership resulted solely from ownership of securities of the Company prior to such transaction; and

(iii) individuals who were members of the Incumbent Board will immediately after the consummation of such transaction constitute at least a majority of the members of the board of directors of the Successor Company.

Where a series of transactions undertaken with a common purpose is deemed to be a Company Transaction, the date of such Company Transaction shall be the date on which the last of such transactions is consummated.

4. Entity ” means any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act).

5. Exchange Act ” means the Securities Exchange Act of 1934, as amended.


6. “F ounder Shareholder ” means any holder of record of the Class B common stock, par value $0.0001 per share, of the Company as of July 25, 2011.

7. Good Reason ” means that Executive, without Executive’s express, written consent, has:

(a) incurred a material reduction in authority, duties or responsibilities at the Company or a Successor Employer (with respect to a reduction in connection with a Change of Control, the Change of Control, by itself, or a change of title will not constitute Good Reason; only a reduction in authority, duties or responsibilities, compared to those immediately prior to the Change of Control, will constitute Good Reason);

(b) incurred a material reduction in Executive’s annual Salary or bonus opportunity (except for reductions in connection with a general reduction in annual Salary for all executives of the Company by an average percentage that is not less than the percentage reduction of Executive’s annual Salary);

(c) suffered a material breach of this Agreement by the Company or a Successor Employer; or

(d) been required to relocate more than fifty (50) miles from Vancouver, BC, or in the event the parties mutually agree that Executive would reside elsewhere, Executive’s then current place of residence, in order to continue to perform the duties and responsibilities of Executive’s position (not including expected travel as described in Section 1 above and customary travel as may be required by the nature of Executive’s position).


8. Parent Company ” means a company or other entity which as a result of a Company Transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more intermediaries.

9. Related Company ” means any entity that is directly or indirectly controlled by, in control of or under common control with the Company.

10. Successor Company ” means the surviving company, the successor company or Parent Company, as applicable, in connection with a Company Transaction.


APPENDIX B

FORM OF RELEASE

In consideration for the payments and benefits to be provided pursuant to Section 3 of the Executive Employment Agreement (“ Agreement ”) entered into by and between (“ E xecutive ”) and Zillow, Inc., a Washington corporation (the “ Company ”), dated             , 2014, Executive agrees to the following:

(a) Executive represents that Executive has not filed any complaints, charges or lawsuits against the Company with any governmental agency or any court.

(b) Executive expressly waives all claims against the Company and releases the Company, and any of the Company’s past, present or future parent, affiliated, related, and/or subsidiary entities, and all of the past and present directors, shareholders, officers, general or limited partners, employees, agents, and attorneys, and agents and representatives of such entities, and employee benefit plans in which Executive is or has been a participant by virtue of his or her employment with the Company (collectively, the “ Releasees ”), from any claims that Executive may have against the Company or the Releasees. It is understood that this release includes, but is not limited to, any claims arising directly or indirectly out of, relating to, or in any other way involving in any manner whatsoever, (1) Executive’s employment with the Company or its subsidiaries or the termination thereof or (2) Executive’s status at any time as a holder of any securities of the Company, including any claims for wages, stock or stock options, employment benefits or damages of any kind whatsoever arising out of any contracts, express or implied, any covenant of good faith and fair dealing, express or implied, any legal restriction on the Company’s right to terminate employment, or any federal, state or other governmental statute


or ordinance, including, without limitation, the Employee Retirement Income Security Act of 1974, Title VII of the Civil Rights Act of 1964, the federal Age Discrimination in Employment Act, the Americans With Disabilities Act, the Family and Medical Leave Act, the Washington Law Against Discrimination Act, the Washington Family and Parental Leave Act, the British Columbia Employment Standards Act, the British Columbia Human Rights Code, or any other legal limitation on the employment relationship (the “ Release ”); provided, however, notwithstanding anything to the contrary set forth herein, that this Release shall not extend to (i) benefit claims under employee pension benefit plans in which Executive is a participant by virtue of Executive’s employment with the Company or its subsidiaries or to benefit claims under employee welfare benefit plans for occurrences (e.g., medical care, death, or onset of disability) arising after the execution of this Release by Executive, (ii) Executive’s rights to severance pay and benefits under the Agreement; (iii) any claims Executive may have for indemnification pursuant to law, contract or Company policy, (iv) any claims for coverage under any applicable directors’ and officers’ insurance policy in accordance with the terms of such policy, or (v) any claims arising from events that occur after the date Executive signs this Release.

Executive understands that this Release includes a release of claims arising under the Age Discrimination in Employment Act (ADEA). Executive understands and warrants that Executive has been given a period of twenty-one (21) days to review and consider this Release or forty-five (45) days if Executive’s termination is part of a group reduction in force. Executive further warrants that Executive understands that, with respect to the release of age discrimination claims only, Executive has a period of seven days (7) after execution of this Release to revoke the release of age discrimination claims by notice in writing to the Company.


EXECUTIVE ACKNOWLEDGES ALL OF THE FOLLOWING:

(A) I HAVE CAREFULLY READ AND HAVE VOLUNTARILY SIGNED THIS RELEASE;

(B) I FULLY UNDERSTAND THE FINAL AND BINDING EFFECT OF THIS RELEASE, INCLUDING THE WAIVER OF CLAIMS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT; AND

(C) PRIOR TO SIGNING THIS RELEASE, I HAVE BEEN ADVISED OF MY RIGHT TO CONSULT, AND HAVE BEEN GIVEN ADEQUATE TIME TO REVIEW MY LEGAL RIGHTS, WITH AN ATTORNEY OF MY CHOICE.

 

 

Signature
Errol Samuelson

 

Date

Exhibit 10.2

ZILLOW, INC.

AMENDED AND RESTATED 2011 INCENTIVE PLAN

RESTRICTED STOCK UNIT AWARD NOTICE

Zillow, Inc. (the “ Company ”) hereby grants to you (“ Participant ”) a Restricted Stock Unit Award (the “ Award ”). The Award is subject to all the terms and conditions set forth in this Restricted Stock Unit Award Notice (the “ Award Notice ”) and the Restricted Stock Unit Award Agreement (the “ Award Agreement ”) and the Zillow, Inc. Amended and Restated 2011 Incentive Plan (the “ Plan ”), which are incorporated into the Award Notice in their entirety.

 

Participant :
Grant Date :

Number of Restricted Stock Units

Subject to Award (the “ Units ”) :

Vesting Commencement Date :
Vesting Schedule :

Additional Terms/Acknowledgement : You acknowledge receipt of, and understand and agree to, the Award Notice, the Award Agreement and the Plan. You further acknowledge that as of the Grant Date, the Award Notice, the Award Agreement and the Plan set forth the entire understanding between you and the Company regarding the Award and supersede all prior oral and written agreements on the subject. The Award is hereby granted in full satisfaction of the Company’s obligations to grant such Award pursuant to the terms of your offer letter dated                     .

Withholding Taxes : Please indicate below the method of tax withholding desired for the Units. This selection is subject to the terms of the Award Agreement:

                     Withholding pursuant to Section 8.2 of the Award Agreement ( delivery of cash )

                     Withholding pursuant to Section 8.3 of the Award Agreement ( sale of shares )

 

ZILLOW, INC.      PARTICIPANT
By:  

 

    

 

Its:          
       Address:   

 

         

 

Attachments :

 

1.      Restricted Stock Unit Award Agreement

 

2.      Plan Summary for the Plan

       


ZILLOW, INC.

AMENDED AND RESTATED 2011 INCENTIVE PLAN

RESTRICTED STOCK UNIT AWARD AGREEMENT

Pursuant to your Restricted Stock Unit Award Notice (the “ Award Notice ”) and this Restricted Stock Unit Award Agreement (this “ Award Agreement ”), Zillow, Inc. (the “ Company ”) has granted to you a Restricted Stock Unit Award (the “ Award ”) under its Amended and Restated 2011 Incentive Plan (the “ Plan ”) for the number of Restricted Stock Units indicated in your Award Notice. Capitalized terms not explicitly defined in this Award Agreement but defined in the Plan have the same definitions as in the Plan.

The details of the Award are as follows:

 

1. Vesting

Subject to the terms of this Award Agreement, the Award will vest as set forth in the Award Notice (the “ Vesting Schedule ”). One share of the Company’s Class A Common Stock will be issuable for each Restricted Stock Unit that vests. Restricted Stock Units that have vested and are no longer subject to forfeiture according to the Vesting Schedule are referred to herein as “ Vested Units .” Restricted Stock Units that have not vested and remain subject to forfeiture under the Vesting Schedule are referred to herein as “ Unvested Units .” The Unvested Units will vest (and to the extent so vested cease to be Unvested Units remaining subject to forfeiture) in accordance with the Vesting Schedule (the Unvested and Vested Units are collectively referred to herein as the “ Units ”).

Except as otherwise provided by this Award Agreement, as soon as practicable after Unvested Units become Vested Units, but not later than 60 days after vesting, the Company will settle the Vested Units by issuing to you one share of the Company’s Class A Common Stock for each Vested Unit. If a vesting date falls on a weekend or any other date on which the Nasdaq Stock Market (“ NASDAQ ”) is not open, affected Units will vest on the next following NASDAQ business day.

 

2. Termination of Service

In the event of your Termination of Service on a full-time basis for any reason, any portion of the Award that has not vested as provided in Section 1 will immediately be forfeited to the Company without payment of any further consideration to you. You will have no further rights, and the Company will have no further obligations to you, with respect to such Unvested Units.

 

3. Securities Law Compliance

3.1 You represent and warrant that you have been furnished with a copy of the Plan and the plan summary for the Plan.

 

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3.2 You hereby agree that you will in no event sell or distribute all or any part of the shares of the Company’s Class A Common Stock that you may receive pursuant to settlement of the Units (the “ Shares ”) unless (a) there is an effective registration statement under the Securities Act of 1933, as amended (the “ Securities Act ”), and applicable state securities laws covering any such transaction involving the Shares, or (b) the Company receives an opinion of your legal counsel (concurred in by legal counsel for the Company) stating that such transaction is exempt from registration or the Company otherwise satisfies itself that such transaction is exempt from registration. [ ADDITIONAL CLAUSE TO BE ADDED FOR SECTION 16 OFFICERS AND DIRECTORS: “You also hereby confirm and understand that even if the Shares acquired pursuant to this Award Agreement have been registered under the Securities Act, if and so long as you are an affiliate of the Company for purposes of Rule 144 of the Securities Act, any subsequent sale of the Shares by you must either be registered under the Securities Act or must satisfy the requirements of Rule 144 or another applicable exemption from such registration requirements.” ] The Company will use commercially reasonable efforts to maintain the effectiveness of a Form S-8 Registration Statement for so long as Shares are issuable pursuant to the Award.

3.3 You confirm that you have been advised, prior to your receipt of the Shares, that neither the offering of the Shares nor any offering materials have been reviewed by any administrator under the Securities Act or any other applicable securities act (the “ Acts ”) and that the Shares cannot be resold unless they are registered under the Acts or unless an exemption from such registration is available.

3.4 You hereby agree to indemnify the Company and hold it harmless from and against any loss, claim or liability, including attorneys’ fees or legal expenses, incurred by the Company as a result of any breach by you of, or any inaccuracy in, any representation, warranty or statement made by you in this Award Agreement or the breach by you of any terms or conditions of this Award Agreement.

 

4. Transfer Restrictions

Units may not be sold, transferred, assigned, encumbered, pledged or otherwise disposed of, whether voluntarily or by operation of law.

 

5. No Rights as Shareholder

You will not have any voting, dividend or any other rights as a shareholder of the Company with respect to the Units.

 

6. Independent Tax Advice

You acknowledge that determining the actual tax consequences to you of receiving or disposing of the Units and the Shares may be complicated. These tax consequences will depend, in part, on your specific situation and may also depend on the resolution of currently uncertain tax law and other variables not within the control of the Company. You are aware that you should consult a competent and independent tax advisor for a full understanding of the specific tax consequences to you of receiving the Units and receiving or disposing of the Shares. Prior to executing the Award Notice, you either have consulted with a competent tax advisor independent of the Company to obtain tax advice concerning the receipt of the Units and the receipt or disposition of the Shares in light of your specific situation or you have had the opportunity to consult with such a tax advisor but chose not to do so.

 

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7. Book Entry Registration of Shares

The Company will issue the Shares by registering the Shares in book entry form with the Company’s transfer agent in your name and the applicable restrictions will be noted in the records of the Company’s transfer agent and in the book entry system.

 

8. Withholding

8.1 You understand that under United States federal tax laws in effect on the Grant Date, you will have taxable compensation income at the time of vesting of the Units based on the Fair Market Value of the underlying Shares on each vesting date. You are ultimately responsible for all taxes owed in connection with the Award (e.g., at grant, vesting and/or upon receipt of the Shares), including any federal, state, local or foreign taxes of any kind required by law to be withheld by the Company in connection with the Award, including FICA or any other tax obligation (the “ Tax Withholding Obligation ”), regardless of any action the Company or any Related Company takes with respect to any such Tax Withholding Obligation. The Company makes no representation or undertaking regarding the adequacy of any tax withholding made in connection with the Award. The Company has no obligation to deliver Shares pursuant to the Award until you have satisfied the Tax Withholding Obligation.

8.2 In connection with your acceptance of this Award Agreement, you may elect no later than 6 months from the Grant Date of the Award to satisfy your Tax Withholding Obligation by delivery of cash or check payable to the Company in an amount that the Company determines is sufficient to satisfy the Tax Withholding Obligation. If you elect to pay the Tax Withholding Obligation by cash or check, Section 8.3 will not apply to your Award. You may make this election on the Award Notice.

8.3 In connection with your acceptance of this Award Agreement, you may elect no later than 6 months from the Grant Date of the Award to satisfy your Tax Withholding Obligation by, subject to the terms of this Section 8.3, irrevocably appointing any brokerage firm acceptable to the Company for such purpose (the “ Agent ”) as your Agent, and authorizing the Agent, to:

 

  (a) Sell on the open market at the then prevailing market price(s), on your behalf, as soon as practicable on or after the settlement date for any Vested Unit, the minimum number of Shares (rounded up to the next whole number) sufficient to generate proceeds to cover the withholding taxes that you are required to pay pursuant to Section 8.1 upon the settlement of a Vested Unit and all applicable fees and commissions due to, or required to be collected by, the Agent;

 

  (b) Remit directly to the Company the cash amount necessary to cover the payment of all taxes required to be withheld with respect to the settlement of a Vested Unit, as of such date;

 

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  (c) Retain the amount required to cover all applicable fees and commissions due to, or required to be collected by, the Agent, relating directly to the sale of Shares referred to in clause (a) above; and

 

  (d) Remit any remaining funds to you.

You may make this election on the Award Notice.

If you make this election under Section 8.3, you hereby represent and warrant that as of the date of making such election, you are not aware of any material, nonpublic information with respect to the Company or any securities of the Company, are not subject to any legal, regulatory or contractual restriction which would prevent the Agent from conducting sales as provided herein, do not have, and will not attempt to exercise, authority, influence or control over any sales of Shares effected pursuant to this Section 8.3, and are entering into the election in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1 (regarding trading of the Company’s securities on the basis of material nonpublic information) under the Exchange Act. It is the intent of the parties that this Award Agreement complies with the requirements of Rule 10b5-1(c)(1)(i)(B) under the Exchange Act and this Award Agreement will be interpreted to comply with the requirements of Rule 10b5-1(c) of the Exchange Act.

You understand that the Agent may effect sales as provided in clause (a) above jointly with sales for other employees of the Company and that the average price for executions resulting from bunched orders will be assigned to your account. In addition, you acknowledge that it may not be possible to sell Shares as provided by this Section 8.3 due to (i) a legal or contractual restriction applicable to you or the Agent, (ii) a market disruption, or (iii) rules governing order execution priority on the exchange where the Shares may be traded. In the event of the Agent’s inability to sell Shares, you will continue to be responsible for payment to the Company of all federal, state, local and foreign taxes that are required by applicable laws and regulations to be withheld.

You acknowledge that regardless of any other term or condition of this Award Agreement, the Agent will not be liable to you for (x) special, indirect, punitive, exemplary, or consequential damages, or incidental losses or damages of any kind, or (y) any failure to perform or for any delay in performance that results from a cause or circumstance that is beyond its reasonable control. You also agree to indemnify and hold the Company harmless from any losses, costs, damages or expenses relating to any sale of shares hereunder.

You hereby agree to execute and deliver to the Agent any other agreements or documents as the Agent reasonably deems necessary or appropriate to carry out the purposes and intent of this Section 8.3. The Agent is a third party beneficiary of this Section 8.3.

8.4 Notwithstanding the foregoing, to the maximum extent permitted by law, the Company has the right to retain without notice from Shares issuable under the Award or from salary or other amounts payable to you, a number of whole Shares or cash having a value sufficient to satisfy the Tax Withholding Obligation, and you hereby authorize the Company or a Related Company to do so.

 

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9. General Provisions

9.1 Assignment . The Company may assign its rights under this Award Agreement at any time, whether or not such rights are then exercisable, to any person or entity selected by the Company’s Board of Directors.

9.2 No Waiver . No waiver of any provision of this Award Agreement will be valid unless in writing and signed by the person against whom such waiver is sought to be enforced, nor will failure to enforce any right hereunder constitute a continuing waiver of the same or a waiver of any other right hereunder.

9.3 Undertaking . You hereby agree to take whatever additional action and execute whatever additional documents the Company may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either you or the Units pursuant to the express provisions of this Award Agreement.

9.4 Agreement Is Entire Contract . This Award Agreement, the Award Notice and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof and supersede all prior oral or written agreements on the subject. This Award Agreement is made pursuant to the provisions of the Plan will in all respects be construed in conformity with the express terms and provisions of the Plan.

9.5 Successors and Assigns . The provisions of this Award Agreement and the Award Notice will inure to the benefit of, and be binding on, the Company and its successors and assigns and you and your legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person will have become a party to this Award Agreement and agreed in writing to join herein and be bound by the terms and conditions hereof.

9.6 No Employment Contract . Nothing in this Award Agreement will affect in any manner whatsoever the right or power of the Company, or any Related Company, to terminate your employment on behalf of the Company or any Related Company, for any reason, with or without Cause.

9.7 Further Action . The parties agree to execute such further instruments and to take such further action as may reasonably necessary to carry out the intent of this Award Agreement.

9.8 Section 409A Compliance . This Award and any Shares issuable thereunder are intended to qualify for an exemption from or comply with Section 409A of the Code. Notwithstanding any other provision in this Award Agreement, the Award Notice and the Plan to the contrary, the Company, to the extent it deems necessary or advisable in its sole discretion, reserves the right, but shall not be required, to unilaterally amend or modify this Award Agreement or the Award Notice so that the Award qualifies for exemption from or complies with Section 409A of the Code; provided, however, that the Company makes no representations that the Award shall be exempt from or comply with Section 409A of the Code and makes no undertaking to preclude Section 409A of the Code from applying to the Award. No provision of this Award Agreement or the Award Notice shall be interpreted or construed to transfer any

 

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liability for failure to comply with Section 409A of the Code from you or any other individual to the Company. By executing the Award Notice, you agree that you shall be deemed to have waived any claim against the Company with respect to any such tax consequences.

9.9 Counterparts . The Award Notice may be executed in two or more counterparts, each of which will be deemed an original, but which, upon execution, will constitute one and the same instrument.

 

-7-

Exhibit 10.3

ZILLOW, INC.

AMENDED AND RESTATED 2011 INCENTIVE PLAN

RESTRICTED UNIT AWARD NOTICE

Zillow, Inc. (the “ Company ”) hereby grants to you (“ Participant ”) a Restricted Unit Award (the “ Award ”). The Award is subject to all the terms and conditions set forth in this Restricted Unit Award Notice (the “ Award Notice ”) and the Restricted Unit Award Agreement (the “ Award Agreement ”) and the Zillow, Inc. Amended and Restated 2011 Incentive Plan (the “ Plan ”), which are incorporated into the Award Notice in their entirety.

 

Participant :
Grant Date :
Number of Restricted Units Subject to Award (the “ Units, ” each Unit having the value of one U.S. dollar as of the Grant Date) :
Vesting Commencement Date :
Vesting Schedule :

Additional Terms/Acknowledgement : You acknowledge receipt of, and understand and agree to, the Award Notice, the Award Agreement and the Plan. You further acknowledge that as of the Grant Date, the Award Notice, the Award Agreement and the Plan set forth the entire understanding between you and the Company regarding the Award and supersede all prior oral and written agreements on the subject.

 

ZILLOW, INC.      PARTICIPANT
By:  

 

    

 

Its:  

 

       
       Address:   

 

         

 

Attachments :

 

1.      Restricted Unit Award Agreement

       


ZILLOW, INC.

AMENDED AND RESTATED 2011 INCENTIVE PLAN

RESTRICTED UNIT AWARD AGREEMENT

Pursuant to your Restricted Unit Award Notice (the “ Award Notice ”) and this Restricted Unit Award Agreement (this “ Award Agreement ”), Zillow, Inc. (the “ Company ”) has granted to you a Restricted Unit Award (the “ Award ”) under its Amended and Restated 2011 Incentive Plan (the “ Plan ”) for the number of Restricted Units indicated in your Award Notice. Capitalized terms not explicitly defined in this Award Agreement or the Award Notice but defined in the Plan have the same definitions as in the Plan.

The details of the Award are as follows:

 

1. Vesting

Subject to the terms of this Award Agreement, the Restricted Units (“ Units ”) will vest as set forth in the Award Notice (the “ Vesting Schedule ”). Units that have vested and are no longer subject to forfeiture according to the Vesting Schedule are referred to herein as “ Vested Units .” Units that have not vested and remain subject to forfeiture under the Vesting Schedule are referred to herein as “ Unvested Units .” The Unvested Units will vest (and to the extent so vested cease to be Unvested Units remaining subject to forfeiture) in accordance with the Vesting Schedule (the Unvested and Vested Units are collectively referred to herein as the “ Units ”).

Each Unit has an initial value of one U.S. dollar (U.S. $1.00) as of the Grant Date and represents the right to receive shares of Class A Common Stock on or following the vesting date, determined by dividing the number of Vested Units by the Fair Market Value of the Company’s Class A Common Stock as of the date immediately preceding the one-year anniversary of the Vesting Commencement Date, rounded down to the nearest whole share.

Except as otherwise provided by this Award Agreement, settlement of Units in shares of Class A Common Stock will occur as soon as practicable after Unvested Units become Vested Units, but not later than 60 days after vesting. If a vesting date falls on a weekend or any other date on which the Nasdaq Stock Market (“ NASDAQ ”) is not open, affected Units will vest on the next following NASDAQ business day.

 

2. Termination of Service

In the event of your Termination of Service on a full-time basis for any reason, any portion of the Award that has not vested as provided in Section 1 and the Award Notice as of the date of such Termination of Service will immediately be forfeited to the Company without payment of any further consideration to you. You will have no further rights, and the Company will have no further obligations to you, with respect to such Unvested Units.

 

3. Securities Law Compliance

3.1 You represent and warrant that you have been furnished with a copy of the Plan and the plan summary for the Plan.

3.2 You hereby agree that you will in no event sell or distribute all or any part of the shares of the Company’s Class A Common Stock that you may receive pursuant to settlement of the Units (the “ Shares ”) unless (a) there is an effective registration statement under the Securities


Act of 1933, as amended (the “ Securities Act ”), and applicable state securities laws covering any such transaction involving the Shares, or (b) the Company receives an opinion of your legal counsel (concurred in by legal counsel for the Company) stating that such transaction is exempt from registration or the Company otherwise satisfies itself that such transaction is exempt from registration. You also hereby confirm and understand that even if the Shares acquired pursuant to this Award Agreement have been registered under the Securities Act, if and so long as you are an affiliate of the Company for purposes of Rule 144 of the Securities Act, any subsequent sale of the Shares by you must either be registered under the Securities Act or must satisfy the requirements of Rule 144 or another applicable exemption from such registration requirements.

3.3 You confirm that you have been advised, prior to your receipt of the Shares, that neither the offering of the Shares nor any offering materials have been reviewed by any administrator under the Securities Act or any other applicable securities act (the “ Acts ”) and that the Shares cannot be resold unless they are registered under the Acts or unless an exemption from such registration is available.

3.4 You hereby agree to indemnify the Company and hold it harmless from and against any loss, claim or liability, including attorneys’ fees or legal expenses, incurred by the Company as a result of any breach by you of, or any inaccuracy in, any representation, warranty or statement made by you in this Award Agreement or the breach by you of any terms or conditions of this Award Agreement.

 

4. Transfer Restrictions

Units may not be sold, transferred, assigned, encumbered, pledged or otherwise disposed of, whether voluntarily or by operation of law.

 

5. No Rights as Shareholder

You will not have any voting, dividend or any other rights as a shareholder of the Company with respect to the Units.

 

6. Independent Tax Advice

You acknowledge that determining the actual tax consequences to you of receiving or disposing of the Units and the Shares may be complicated. These tax consequences will depend, in part, on your specific situation and may also depend on the resolution of currently uncertain tax law and other variables not within the control of the Company. You are aware that you should consult a competent and independent tax advisor for a full understanding of the specific tax consequences to you of receiving the Units and receiving or disposing of the Shares. Prior to executing the Award Notice, you either have consulted with a competent tax advisor independent of the Company to obtain tax advice concerning the receipt of the Units and the receipt or disposition of the Shares in light of your specific situation or you have had the opportunity to consult with such a tax advisor but chose not to do so.

 

7. Book Entry Registration of Shares

The Company will issue the Shares by registering the Shares in book entry form with the Company’s transfer agent in your name and the applicable restrictions will be noted in the records of the Company’s transfer agent and in the book entry system.


8. Withholding

8.1 You are ultimately responsible for all taxes owed in connection with the Award (e.g., at vesting and/or upon receipt of the Shares), including any domestic or foreign tax withholding obligation required by law, whether national, federal, state or local, including FICA or any other social tax obligation (the “ Tax Withholding Obligation ”), regardless of any action the Company or any Related Company takes with respect to any such Tax Withholding Obligation that arises in connection with this Award. The Company may refuse to issue any Shares to you until you satisfy the Tax Withholding Obligation.

8.2 In order to satisfy your obligations set forth in Section 8.1, you hereby irrevocably appoint any brokerage firm acceptable to the Company for such purpose (the “ Agent ”) as your Agent, and authorize the Agent, to:

 

  (a) Sell on the open market at the then prevailing market price(s), on your behalf, as soon as practicable on or after the settlement date for any Vested Units, the minimum number of Shares (rounded up to the next whole number) sufficient to generate proceeds to cover the withholding taxes that you are required to pay pursuant to Section 8.1 upon the settlement of Vested Units and all applicable fees and commissions due to, or required to be collected by, the Agent;

 

  (b) Remit directly to the Company the cash amount necessary to cover the payment of all taxes required to be withheld with respect to the settlement of Vested Units, as of such date;

 

  (c) Retain the amount required to cover all applicable brokerage fees, commissions and other costs of sale due to, or required to be collected by, the Agent, relating directly to the sale of Shares referred to in clause (a) above; and

 

  (d) Remit any remaining funds to you.

As of the date of execution of the Award Notice, you represent and warrant that you are not aware of any material nonpublic information with respect to the Company or any securities of the Company, are not subject to any legal, regulatory or contractual restriction that would prevent the Agent from conducting sales as provided herein, do not have, and will not attempt to exercise, authority, influence or control over any sales of Shares effected pursuant to this Section 8.2, and are entering into this Section 8.2 of the Award Agreement in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1 (regarding trading of the Company’s securities on the basis of material nonpublic information) under the Exchange Act. It is the intent of the parties that this Section 8.2 comply with the requirements of Rule 10b5-1(c)(1)(i)(B) under the Exchange Act and the Award Agreement will be interpreted to comply with the requirements of Rule 10b5-1(c) of the Exchange Act.

You understand that the Agent may effect sales as provided in clause (a) above jointly with sales for other employees of the Company and that the average price for executions resulting from bunched orders will be assigned to your account. You acknowledge that neither the Company nor the Agent is under any obligation to arrange for such sales at any particular price, and that the proceeds of any such sale may not be sufficient to satisfy your Tax Withholding Obligation. In addition, you acknowledge that it may not be possible to sell Shares as provided by this Section 8.2 due to (i) a legal or contractual restriction applicable to you or the Agent, (ii) a market disruption, or (iii) rules governing order execution priority on the NASDAQ Stock Market or other exchange where the Shares may be traded. In the event of the Agent’s inability to sell any Shares or that number of Shares sufficient to cover your Tax Withholding Obligation, you will continue to be responsible for payment to the Company of all federal, state, local and foreign taxes that are required by applicable laws and regulations to be withheld.


You acknowledge that regardless of any other term or condition of the Award Agreement, neither the Agent nor the Company will be liable to you for (a) special, indirect, punitive, exemplary, or consequential damages, or incidental losses or damages of any kind, or (b) any failure to perform or for any delay in performance that results from a cause or circumstance that is beyond the Agent’s reasonable control.

You hereby agree to execute and deliver to the Agent any other agreements or documents as the Agent reasonably deems necessary or appropriate to carry out the purposes and intent of this Section 8.2. The Agent is a third party beneficiary of this Section 8.2.

8.3 Notwithstanding the forgoing, to the maximum extent permitted by law, the Company has the right to retain without notice from Shares issuable under the Award or from salary or other amounts payable to you, Shares or cash having a value sufficient to satisfy the Tax Withholding Obligation.

 

9. General Provisions

9.1 Assignment . The Company may assign its rights under this Award Agreement at any time, whether or not such rights are then exercisable, to any person or entity selected by the Company’s Board of Directors.

9.2 No Waiver . No waiver of any provision of this Award Agreement will be valid unless in writing and signed by the person against whom such waiver is sought to be enforced, nor will failure to enforce any right hereunder constitute a continuing waiver of the same or a waiver of any other right hereunder.

9.3 Undertaking . You hereby agree to take whatever additional action and execute whatever additional documents the Company may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either you or the Units pursuant to the express provisions of this Award Agreement.

9.4 Agreement Is Entire Contract . This Award Agreement, the Award Notice and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof and supersede all prior oral or written agreements on the subject. This Award Agreement is made pursuant to the provisions of the Plan will in all respects be construed in conformity with the express terms and provisions of the Plan.

9.5 Successors and Assigns . The provisions of this Award Agreement and the Award Notice will inure to the benefit of, and be binding on, the Company and its successors and assigns and you and your legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person will have become a party to this Award Agreement and agreed in writing to join herein and be bound by the terms and conditions hereof.

9.6 No Employment Contract . Nothing in this Award Agreement will affect in any manner whatsoever the right or power of the Company, or any Related Company, to terminate your employment on behalf of the Company or any Related Company, for any reason, with or without cause.


9.7 Further Action . The parties agree to execute such further instruments and to take such further action as may reasonably necessary to carry out the intent of this Award Agreement.

9.8 Section 409A Compliance . This Award and any Shares issuable thereunder are intended to qualify for an exemption from or comply with Section 409A of the Code. Notwithstanding any other provision in this Award Agreement, the Award Notice and the Plan to the contrary, the Company, to the extent it deems necessary or advisable in its sole discretion, reserves the right, but shall not be required, to unilaterally amend or modify this Award Agreement or the Award Notice so that the Award qualifies for exemption from or complies with Section 409A of the Code; provided, however, that the Company makes no representations that the Award shall be exempt from or comply with Section 409A of the Code and makes no undertaking to preclude Section 409A of the Code from applying to the Award. No provision of this Award Agreement or the Award Notice shall be interpreted or construed to transfer any liability for failure to comply with Section 409A of the Code from you or any other individual to the Company. By executing the Award Notice, you agree that you shall be deemed to have waived any claim against the Company with respect to any such tax consequences.

9.9 Counterparts . The Award Notice may be executed in two or more counterparts, each of which will be deemed an original, but which, upon execution, will constitute one and the same instrument.

Exhibit 10.4

ZILLOW, INC.

Confidential Information, Inventions, and

Nonsolicitation Agreement

In consideration of my employment as an employee with Zillow, Inc., a Washington corporation (the “ Company ”), the compensation paid to me by the Company, any stock or stock options which may be granted to me, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, I agree as follows:

 

A. Section 1. Definitions

1.1 “ Competing Business means any business whose efforts are in competition with the efforts of the Company. A Competing Business includes any business whose efforts involve any research and development, products or services in competition with products or services which are, during and at the end of the Term, either (a) produced, marketed or otherwise commercially exploited by the Company or (b) in actual or demonstrably anticipated research or development by the Company.

1.2 “ Confidential Information means any information that (a) relates to the business of the Company, (b) is not generally available to the public, and (c) is conceived, compiled, developed, discovered or received by, or made available to, me during the Term, whether solely or jointly with others, and whether or not while engaged in performing work for the Company. Confidential Information includes information, both written and oral, relating to Inventions, trade secrets and other proprietary information, technical data, products, services, finances, business plans, marketing plans, legal affairs, suppliers, clients, prospects, opportunities, contracts or assets of the Company. Confidential Information also includes any information which has been made available to the Company by or with respect to third parties and which the Company is obligated to keep confidential.

1.3 “ Invention means any product, device, technique, know-how, computer program, algorithm, method, process, procedure, improvement, discovery or invention, whether or not patentable or copyrightable and whether or not reduced to practice, that (a) is within the scope of the Company’s business, research or investigations or results from or is suggested by any work performed by me for the Company and (b) is created, conceived, reduced to practice, developed, discovered, invented or made by me during the Term, whether solely or jointly with others, and whether or not while engaged in performing work for the Company.

1.4 “ Material means any product, prototype, model, document, diskette, tape, picture, design, recording, writing or other tangible item which contains or manifests, whether in printed, handwritten, coded, magnetic or other form, any Confidential Information, Invention or Proprietary Right.

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1.5 “ Person means any individual, corporation, partnership, trust, association, governmental authority, educational institution or other entity.

1.6 “ Proprietary Right means any patent, copyright, trade secret, trademark, trade name, service mark, maskwork or other protected intellectual property right in any Confidential Information, Invention or Material.

1.7 “ Term means the term of my employment with the Company, whether on a full-time, part-time or consulting basis.

 

B. Section 2. Ownership and Use

2.1 The Company will be the exclusive owner of all Confidential Information, Inventions, Materials and Proprietary Rights. To the extent applicable, all Materials will constitute “works for hire” under applicable copyright laws.

2.2 I assign and transfer, and agree to assign and transfer, to the Company all rights and ownership that I have or will have in Confidential Information, Inventions, Materials and Proprietary Rights, subject to the limitations set forth in Section 2.5 and in the notice below. Further, I waive any moral rights that I may have in any Confidential Information, Inventions, Materials and Proprietary Rights. I will take such action (including signature and assistance in preparation of documents or the giving of testimony) as may be requested by the Company to evidence, transfer, vest or confirm the Company’s rights and ownership in Confidential Information, Inventions, Materials and Proprietary Rights. I agree to keep and maintain adequate and current written records of all Inventions and Proprietary Rights during the Term. The records will be in the form of notes, sketches, drawings, and any other format that may be specified by the Company. The records will be available to and remain the sole property of the Company at all times. I will not contest the validity of any Proprietary Right, or aid or encourage any third party to contest the validity of any Proprietary Right of the Company.

If the Company is unable for any reason to secure my signature to fulfill the intent of the foregoing paragraph or to apply for or to pursue any application for any United States or foreign patents or copyright registrations covering Inventions assigned to the Company above, then I irrevocably appoint the Company and its authorized agents as my agent and attorney in fact, to transfer, vest or confirm the Company’s rights and to execute and file any such applications and to do all other lawful acts to further the prosecution and issuance of letters patent or copyright registrations with the same legal force as if done by me.

2.3 Except as required for performance of my work for the Company or as authorized in writing by the Company, I will not (a) use, disclose, publish or distribute any Confidential Information, Inventions, Materials or Proprietary Rights or (b) remove any Materials from the Company’s premises.

2.4 I will promptly disclose to the Company all Confidential Information, Inventions, Materials or Proprietary Rights, as well as any business opportunity which comes

 

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to my attention during the Term and which relates to the business of the Company or which arises as a result of my employment with the Company. I will not take advantage of or divert any such opportunity for the benefit of myself or anyone else either during or after the Term without the prior written consent of the Company.

2.5 Exhibit A is a list describing all inventions, original works of authorship, developments, improvements, and trade secrets which were made by me prior to the Term (collectively referred to as “ Prior Inventions ”), which belong to me, which relate to the Company’s current or proposed business, products or research and development, and which are not assigned to the Company; or, if no such list is attached, I represent that there are no such Prior Inventions. If, during the Term, I incorporate into a Company product, process, service or machine a Prior Invention owned by me or in which I have an interest, the Company is granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license to make, have made, modify, use and sell such Prior Invention as part of or in connection with such product, process, service or machine.

NOTICE : Notwithstanding any other provision of this Agreement to the contrary, this Agreement does not obligate me to assign or offer to assign to the Company any of my rights in an invention for which no equipment, supplies, facilities or trade secret information of the Company was used and which was developed entirely on my own time, unless (a) the invention relates (i) directly to the business of the Company or (ii) to the Company’s actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by me for the Company. This satisfies the written notice and other requirements of RCW 49.44.140 [ and Section 2870 of the California Labor Code ] .

 

C. Section 3. Further Obligations

3.1 My execution, delivery and performance of this Agreement and the performance of my other obligations and duties to the Company will not cause any breach, default or violation of any other employment, nondisclosure, confidentiality, consulting or other agreement to which I am a party or by which I may be bound. Attached as Exhibit B is a list of all prior agreements now in effect under which I have agreed to keep information confidential or not to compete or solicit employees of any Person.

3.2 I will not use in performance of my work for the Company or disclose to the Company any trade secret, confidential or proprietary information of any prior employer or other Person if and to the extent that such use or disclosure may cause a breach, default or violation of any obligation or duty that I owe to such other Person (e.g., under any agreement or applicable law). My compliance with this paragraph will not prohibit, restrict or impair the performance of my work, obligations and duties to the Company.

 

D. Section 4. Nonsolicitation

4.1 During the Term and for one year after the end of the Term, I will not induce, or attempt to induce, any employee or independent contractor of the Company to cease such employment or relationship to engage in, be employed by, perform services for, participate in the ownership, management, control or operation of, or otherwise be connected with, either directly or indirectly, any business other than the Company.

 

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4.2 During the Term and for one year after the end of the Term, I agree (except on behalf of or with the prior written consent of the Company) that I will not, directly or indirectly attempt to solicit, divert, appropriate to or accept on behalf of any Competing Business, any business from any customer or actively sought prospective customer of the Company with whom I have dealt, whose dealings with the Company have been supervised by me or about whom I have acquired Confidential Information in the course of my employment

 

E. Section 5. Termination of Relationship

5.1 I agree that at the end of the Term I will deliver to the Company (and will not keep in my possession, re-create or deliver to anyone else) any and all Materials and other property belonging to the Company, its successors or assigns. I agree to sign and deliver the “ Termination Certification ” attached as Exhibit C.

5.2 At the end of the Term, I agree to provide the name of my new employer, if any, and consent to notification by the Company to my new employer about my rights and obligations under this Agreement in the form of Exhibit D.

 

F. Section 6. Employment At Will

I agree that my employment is “at will” which means that it can be terminated at any time by the Company or by me, with or without cause and with or without notice. I agree that any promise or obligation that my employment be on any other basis than “at will” is invalid unless in writing signed by the President or Chief Executive Officer of the Company. I agree to abide by the Company’s rules, regulations, policies and practices as revised from time to time.

 

G. Section 7. Miscellaneous

7.1 Survival . This Agreement will survive the end of the Term.

7.2 Injunctive Relief; Costs. I acknowledge that my obligations under this Agreement are important to the Company, and that the Company would not employ or continue to employ me without my agreement to such obligations. I also acknowledge that if I do not abide by my obligations in this Agreement, the Company will suffer immediate and irreparable harm, and that the damage to the Company will be difficult to measure and financial relief will be incomplete. Accordingly, the Company will be entitled to injunctive relief and other equitable remedies in the event of a breach by me of any obligation under this Agreement. The rights and remedies of the Company under this section are in addition to all other remedies. Further, in any legal action or other proceeding in connection with this Agreement (e.g., to recover damages or other relief), the prevailing party will be entitled to recover its reasonable attorneys’ fees and other costs incurred.

 

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7.3 Severability . This Agreement will be enforced to the fullest extent permitted by applicable law. If for any reason any provision of this Agreement is held to be invalid or unenforceable to any extent, then (a) such provision will be interpreted, construed or reformed to the extent reasonably required to render the same valid, enforceable and consistent with the original intent underlying such provision and (b) such invalidity or unenforceability will not affect any other provision of this Agreement or any other agreement between the Company and me.

7.4 Governing Law; Jurisdiction; Venue . This Agreement will be governed by the laws of the state of Washington without regard to principles of conflicts of law. I irrevocably consent to the jurisdiction and venue of the state and federal courts located in King County, Washington in connection with any action relating to this Agreement. I will not bring any action relating to this Agreement in any other court.

7.5 Amendments . Neither this Agreement nor any provision may be amended except by written agreement signed by the parties.

7.6 Waivers . No waiver of any breach shall be considered valid unless in writing, and no waiver shall be a waiver of any subsequent breach.

7.7 Acknowledgment . I have carefully read all of the provisions of this Agreement and agree that (a) the same are necessary for the reasonable and proper protection of the Company’s business, (b) the Company has been induced to enter into and/or continue its relationship with me in reliance upon my compliance with the provisions of this Agreement, (c) every provision of this Agreement is reasonable with respect to its scope and duration, (d) I have executed this Agreement without duress or coercion from any source, and (e) I have received a copy of this Agreement.

This Agreement shall be effective as of             ,         .

 

 

Signature

 

FULL NAME (print or type)

 

ACCEPTED :
ZILLOW, INC.
By  

 

Its  

 

 

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EXHIBIT A

LIST OF PRIOR INVENTIONS AND

ORIGINAL WORKS OF AUTHORSHIP

 

Title

 

Date

 

Identifying Number or Brief Description

   
   
   
   

 

    No inventions or improvements
    Additional Sheets Attached

 

Signature of Employee:  

 

Print Name of Employee:  

 

Date:  

 

 

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EXHIBIT B

The following is a list of all prior agreements with former employers or others to which I am a party in which I agreed to maintain the confidentiality of the information of, or not to compete with or solicit the employees or customers of a third party.

 

    No Agreements
    See below
    Additional sheets attached

 

Signature of Employee:  

 

Print Name of Employee:  

 

Date:  

 

 

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EXHIBIT C

TERMINATION CERTIFICATION

This is to certify that I do not have in my possession, and I have not failed to return, any Materials or other property belonging to Zillow, Inc., its subsidiaries, affiliates, successors or assigns (together, the “Company”).

I further certify that I have complied with all the terms of the Company’s Confidential Information, Inventions, and Nonsolicitation Agreement signed by me, including the reporting of any Inventions conceived or made by me (solely or jointly with others) covered by that Agreement.

I further agree that, in compliance with the Agreement, I will not use, disclose, publish or distribute any Confidential Information, Inventions, Materials or Proprietary Rights.

During the Term and for one year after the end of the Term, I will not induce, or attempt to induce, any employee or independent contractor of the Company to cease such employment or relationship to engage in, be employed by, perform services for, participate in the ownership, management, control or operation of, or otherwise be connected with, either directly or indirectly, any business other than the Company.

 

Signature of Employee:  

 

Print Name of Employee:  

 

Date:  

 

 

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EXHIBIT D

NOTIFICATION TO NEW EMPLOYERS

Dear [ name of new employer’s president ] :

We understand that our former employee, [ name of employee ] , has accepted employment with your company. This letter is to advise you that [ name of employee ] signed a Confidential Information, Inventions, and Nonsolicitation Agreement with our Company that remains in full force and effect. At the time [ name of employee ] left our company, we advised [ him/her ] of [ his/her ] continuing obligations under the Agreement and [ name of employee ] signed a Termination Certificate affirming [ his/her ] obligations under the Agreement. A copy of the Termination Certificate, dated            , 20    , is enclosed so that any conflict with these obligations can be avoided during [ his/her ] employment with you.

 

Very truly yours,
[Signature of Company president or corporate counsel]

 

[Typed name]

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULE 13-14(A) OF THE SECURITIES

EXCHANGE ACT OF 1934 AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Spencer M. Rascoff, certify that:

1. I have reviewed this report on Form 10-Q of Zillow, Inc. for the fiscal quarter ended March 31, 2014;

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 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 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.

 

By:  

/s/ S PENCER M. R ASCOFF

Name:   Spencer M. Rascoff
Title:   Chief Executive Officer
Date:   May 8, 2014

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO RULE 13-14(A) OF THE SECURITIES

EXCHANGE ACT OF 1934 AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Chad M. Cohen, certify that:

1. I have reviewed this report on Form 10-Q of Zillow, Inc. for the fiscal quarter ended March 31, 2014;

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 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 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.

 

By:  

/s/ C HAD M. C OHEN

Name:   Chad M. Cohen
Title:   Chief Financial Officer
Date:   May 8, 2014

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Zillow, Inc. (the “Company”) for the fiscal quarter ended March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Spencer M. Rascoff, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

By:  

/s/ S PENCER M. R ASCOFF

Name:   Spencer M. Rascoff
Title:   Chief Executive Officer
Date:   May 8, 2014

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Zillow, Inc. (the “Company”) for the fiscal quarter ended March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Chad M. Cohen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

By:  

/s/ C HAD M. C OHEN

Name:   Chad M. Cohen
Title:   Chief Financial Officer
Date:   May 8, 2014