DRS/A
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Amendment No. 2 to Draft Registration Statement, as confidentially submitted to the Securities and Exchange Commission on August 13, 2021.

This draft registration statement has not been filed publicly with the Securities and Exchange Commission, and all information herein remains strictly confidential.

Registration No. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

Udemy, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7372   27-1779864

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

600 Harrison Street, 3rd Floor

San Francisco, California 94107

(415) 813-1710

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Gregg Coccari

President and Chief Executive Officer

600 Harrison Street, 3rd Floor

San Francisco, California 94107

(415) 813-1710

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

 

 

Copies to:

 

Tony Jeffries

Yoichiro Taku

Christina Poulsen

Wilson Sonsini Goodrich & Rosati

Professional Corporation

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

Ken Hirschman, SVP Operations and General Counsel

Victoria Nemiah, Associate General Counsel

Udemy, Inc.

600 Harrison Street, 3rd Floor

San Francisco, California 94107

(415) 813-1710

 

Daniel N. Webb

Simpson Thacher & Bartlett LLP

2475 Hanover Street

Palo Alto, California 94304

(650) 251-5000

 

 

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

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

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

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

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

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

 

Large accelerated filer         Accelerated filer       
Non-accelerated filer         Smaller reporting company       
     Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

CALCULATION OF REGISTRATION FEE

 

 

 

 

Title of Each Class of

Securities to be Registered

   Proposed
Maximum
Aggregate
Offering  Price(1)(2)
     Amount of
Registration Fee
 

Common Stock, $0.00001 par value

           $                                        $                            

 

 

 

 
(1)

Includes offering price of any additional shares of common stock that the underwriters have the option to purchase.

(2)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

 

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

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated                 , 2021

Preliminary prospectus

 

 

LOGO

 

 

  Common stock

  

             shares  

This is an initial public offering of shares of common stock by Udemy, Inc. We are offering             shares of our common stock to be sold in the offering. The initial public offering price is expected to be between $         and $         per share.

Prior to this offering, there has been no public market for our common stock. We intend to apply to list our common stock on the                  under the symbol “UDMY”.

We are an “emerging growth company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced reporting requirements.

 

     Per share     Total  
Initial public offering price   $                                                    $                                                 
Underwriting discounts and commissions(1)   $       $    
Proceeds to Udemy, Inc., before expenses   $       $    

 

(1)

See “Underwriters” for a description of the compensation payable to the underwriters.

We have granted the underwriters an option for a period of 30 days to purchase up to              additional shares of common stock.

Investing in our common stock involves a high degree of risk. See “Risk factors” beginning on page 14.

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

The underwriters expect to deliver the shares to purchasers on or about                     , 2021.

 

Morgan Stanley   J.P. Morgan
Citigroup   BofA Securities   Jefferies   Truist
KeyBanc Capital Markets   Piper Sandler   William Blair   Baird   Needham & Company

                    , 2021


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Table of contents

 

        Page      
Prospectus summary     1  
Risk factors     14  
Special note regarding forward-looking statements     48  
Market, industry, and other data     50  
Use of proceeds     51  
Dividend policy     52  
Capitalization     53  
Dilution     55  
Selected consolidated financial and other data     58  
Management’s discussion and analysis of financial condition and results of operations     60  
Business     84  
Management     98  
Executive compensation     107  
Certain relationships and related party transactions     120  
Principal stockholders     122  
Description of capital stock     124  
Shares eligible for future sale     130  
Material U.S. federal income tax considerations for non-U.S. holders of our common stock     132  
Underwriters     137  
Legal matters     144  
Experts     144  
Where you can find additional information     144  
Index to financial statements     F-1  

 

 

Through and including                 , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

Neither we nor the underwriters have authorized anyone to provide you any information or make any representations other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations, and prospects may have changed since that date.

For investors outside of the United States: we have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

 

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Prospectus summary

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially “Risk factors” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus, before making an investment decision. As used in this prospectus, unless the context otherwise requires, references to “we,” “us,” “our,” “our company,” and “Udemy” refer to Udemy, Inc.

Overview

Our mission is to create new possibilities for people and organizations everywhere by connecting them to the knowledge and skills they need to succeed in a changing world. Our marketplace platform, with thousands of up-to-date courses in dozens of languages, provides the tools that learners, instructors, and enterprises need to achieve their goals and reach their full potential.

We believe traditional education and training methods are fast becoming outdated. Technological advancements and novel industries have significantly altered the types of skills required of workers, and lifelong training and continuous skills acquisition are becoming the norm. There is a clear need to expand access to learning across traditional barriers such as geography and social demographics.

Udemy operates a two-sided marketplace where our instructors develop content to meet learner demand. Courses can be accessed through our direct-to-consumer or Udemy Business, or UB, offerings. Our platform provides over 39 million learners with access to over 158,000 courses in over 65 languages and 180 countries.

Udemy courses address learning objectives such as reskilling or upskilling in technology and business, enhancing soft skills, and personal development. We analyze platform data to better determine our learners’ needs, helping us match individuals with relevant courses and, within UB, learning paths for a more personalized experience. Our learners also receive access to interactive learning tools such as quizzes, exercises, and instructor questions-and-answers, or Q&A.

Within our marketplace and UB catalog, we provide learners with high-quality content by prioritizing courses based on factors such as learner feedback and ratings, topic relevance, content quality, and instructor engagement.

Our business has experienced rapid growth. From 2019 to 2020, our revenue grew 55.6% to $429.9 million, which includes over 100% growth in UB revenue, although we incurred net losses of $69.7 million and $77.6 million during 2019 and 2020, respectively.

Industry

As technological advancements, new fields of study, and novel industries render existing skill sets obsolete, the need for a new model for learning and teaching skills is urgent. According to the World Economic Forum, companies surveyed estimate that around 40% of workers will require short-cycle reskilling (i.e., six months or less), and 94% of business leaders report that they expect employees to pick up new skills on the job.

The shift to online learning has been ongoing for years, and the COVID-19 pandemic has further accelerated this shift. According to the World Economic Forum, 84% of employers surveyed report that the COVID-19 pandemic has increased the need to digitize.

Unfortunately, many of today’s options have a number of shortcomings:

 

   

Relevance: Traditional learning solutions rely on the so-called publisher model, which involves a lengthy, centralized, and expensive “top-down” development process by multiple levels of editors and


 

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reviewers. We believe a top-down publisher model disincentivizes continuous course creation or improvement post-publication because it limits the speed of course development, instructors’ creative oversight over their content, and the cost-effectiveness of localized content production.

 

   

Breadth: Due to the slower speed and higher costs associated with the publisher model, existing solutions often focus on a few popular learning areas such as technical skills or creative skills. These training options may lack the content breadth and instructor diversity to meet the interdisciplinary objectives of modern learners.

 

   

Quality: Because traditional providers often lack quality indicators such as ratings, reviews, and past performance, finding high-quality content can prove difficult and time consuming for learners.

 

   

Scalability: Existing solutions have proven ineffective at operating on a global scale. Many rely on in-person training and have been slow to leverage technology, making them difficult to reproduce at scale. Other digital solutions, despite being more scalable than in-person training, have also struggled to provide local content for international communities.

 

   

Affordability: The high cost of learning solutions prevents many individual learners from advancing or upgrading their skills. Likewise, pricing for existing solutions is often standardized globally, further limiting access in many geographies.

We offer a new approach, one that addresses these shortcomings and effectively connects the global ecosystem of learners to up-to-date knowledge from experts and practitioners around the world. We are creating a better learning experience.

Our market opportunity

According to a HolonIQ study, the global online and offline education market was $2.6 trillion across higher education, corporate training, and online learning in 2019. Before the COVID-19 pandemic, the majority of corporate training occurred offline, and we believe that online education is well placed to address the scalability and affordability limitations of offline education. With the increase of internet connectivity, technological advances, and interactive tools at a low cost, we expect a massive shift from offline to online.

Based on data from Arizton, we estimate our market opportunity in online learning to be $223 billion. We calculate this estimate by aggregating the global corporate opportunity of $71 billion and the global consumer opportunity of $152 billion in 2021. We believe that our market opportunity could grow to be multiples of today’s estimate as learning continues to transition online.

Further, we believe that online education can address the rising demand for lifelong learning in the rapidly evolving world economy, a development that would expand our market opportunity to include the majority of the global adult population.

Our solution: the world’s learning platform

Our platform allows individual learners and organizations all over the world to access affordable, relevant, and up-to-date content from experts and experienced practitioners in nearly every field. We combine high-quality content with data insights and technology to create a platform purpose-built for the needs of learners, instructors, and organizations.

Our platform delivers a powerful flywheel of content creation, engagement, and continuous content optimization. Our expert instructors continuously generate new courses and update existing ones, while our marketplace encourages engagement on the most in-demand topics. The volume and frequency of these interactions allow us to generate meaningful insights and provide real-time feedback and analytics for our instructors. These data insights in turn improve content quality, enhance course personalization, and optimize productivity and satisfaction for our learners.


 

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One way that we foster access to courses for individual learners and enterprises is through broad content distribution across our various channels. We leverage machine learning, or ML, to increase learner retention and conversion using enhanced personalization. At the same time, we believe our model encourages more relevant and engaging content through well-aligned incentives for our instructors, supported by consistent improvement from the feedback and data collected from individual learners and Udemy Business customers.

Individual learners have access to thousands of free courses on our platform, which represents an important source of customer acquisition. Once learners interact with our platform, our ML algorithms then recommend courses for learners to purchase based on topic, quality, instructor rating, number of enrollments, learner’s country of origin, and more. The algorithms help us maximize revenue while offering the best value to learners.

We also offer unlimited access to a curated catalog of courses through our Consumer, Enterprise, and Team plan subscriptions. The courses selected for the subscription plans are among the highest quality, most relevant, and most popular on our platform. Learners can access the Consumer subscription plan for a monthly fee, whereas Enterprise plans have annual licenses that are priced based on volume. Our Team plan offers enterprises access to 5,500 top-rated courses for 5-20 seats at an annual rate starting at $360 per seat. The Enterprise plan begins with the same offering as the Team plan and supplements it with administrative tools, insights, learning playbooks, and additional courses through our language packages.

In addition to these subscriptions, we offer immersive learning experiences such as labs, skills assessments, and coding exercises in a range of verticals.

What we offer our learners

We provide over 39 million learners with relevant, affordable, and high-quality content, and we do this on a platform that enables the constant improvement of our courses by leveraging the social validation of over 486 million course enrollments, as well as thousands of ratings and reviews. With Udemy, learners can fulfill objectives involving:

 

   

Technical skills: Learners often seek to gain proficiency in the latest technology, which helps them stay competitive through upskilling or reskilling their capabilities.

 

   

Business skills: Business and professional soft skills, such as negotiation strategy or team leadership, are in constant demand as individuals look to advance their careers, react to new workplace environments, or take on new responsibilities.

 

   

Personal development: Learners like to complement their primary skills with discovery of new interests or hobbies such as music, drawing, and wellness.

Learners on Udemy receive a comprehensive and immersive experience through interactive exercises and the ability to communicate directly with instructors through Q&A functionality.

What we offer our Udemy Business customers

We have over 7,000 global Udemy Business customers, including 41 of the Fortune 100. Enterprise customers typically express high satisfaction with their UB experience, resulting in our average net promoter score of 49.

Our curated UB offering begins with 5,500 of the most engaging and relevant courses available on our platform. We also offer an extensive non-English language collection, which includes courses in Spanish, Portuguese, German, Japanese, and French. Arabic, Indonesian, Italian, Mandarin, and Turkish language packages were launched in 2021, and we plan to launch Korean, Polish, and Russian language packages later in the year.


 

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We use a rigorous selection process across a wide set of criteria to determine the courses that will be offered as part of UB, including:

 

   

User behavior: Learner feedback and ratings, as well as content searches, help us determine which courses to maintain or add to UB.

 

   

Customer input: Specific content requests, prospects’ requests for proposal, and customer success stories are evaluated to identify new areas of focus that help ensure the continued strong relevance of our offering.

 

   

Market research: Industry trends and instructor interviews help us determine relevant topics and new technologies valued by enterprises and their employees.

 

   

Competitor analysis: We monitor market data and analyst reports on an ongoing basis to stay at the forefront of market demand and quickly address any applicable gaps within the topics offered.

As of December 31, 2020, the UB course catalog included over 32,000 hours of technical content and over 10,000 hours of business and professional skills content. On average, over 130 new courses are added each month. Our overall UB course catalog has increased from fewer than 2,500 courses in 2017 to over 8,000 today.

We offer UB customers learning paths, which allow organizations to assemble customized learning series made up of Udemy courses, the organization’s own material, and links to external resources. Learning paths are only visible within the organization that creates them and offer a unique benefit to administrators and employees. As of December 31, 2020, our enterprise customers have generated over 210,000 learning paths.

We also offer UB customers a comprehensive analytics dashboard and other powerful tools where our customers can gain high visibility into the progress, areas of focus, and feedback of their employees. This strong set of tools, which includes our learning playbooks, helps our UB customers better understand and optimize learning experiences for their employees and ensure they are delivering a strong and measurable return on their investment in learning skills.

What we offer our instructors

We offer instructors from around the world access to a global audience of over 39 million learners. Our model allows instructors who elect to charge for courses to share directly in the economic upside of the course content they contribute and the growth of our platform. In 2020, our paid instructors earned $161.4 million from Udemy for their courses, with average paid instructor earnings of $2,950 and over 9,000 global instructors receiving more than $1,000 in earnings. The breadth of instructors and courses contributes to the wide variety of content topics available on our platform, as well as meaningful depth within most content categories. We believe that this combination of breadth and depth helps foster competition and choice on our platform and attracts learners and UB customers.

We enable our instructors to drive innovation and ongoing engagement on our platform. Instructors can use platform insights, review feedback from learners, and harness analytics dashboards to manage their course content, brand, and course marketing. Our performance marketing engine identifies and selects the best courses to be featured to each learner around the world. In addition, we offer instructors insight on the revenue opportunity and existing content for any given topic, and we provide auto-generated translated captions from English to Spanish, Portuguese, French, German, Italian, and Polish.

When an instructor’s course is added to the UB catalog, instructors are subject to an exclusivity clause for the use of their content on our platform, pursuant to which instructors agree, subject to limited exceptions,


 

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not to offer any on-demand content, such as pre-recorded courses, on any competing platform in a way that directly competes with or impairs the sales of such content on our platform. This exclusivity clause is effective for so long as an instructor’s content is included in the UB catalog, and we may continue to include content in the UB catalog for up to 12 months after an instructor elects to opt out of the UB catalog. We believe these exclusivity arrangements increase the value of our offerings by increasing the amount of unique content on Udemy and helping maintain our robust roster of expert instructors.

We believe that, on average, the value we offer instructors ultimately delivers a far higher return on investment relative to other content creation and online learning competitors.

Our competitive strengths

We believe our business model benefits from several competitive advantages:

Global distribution and reach with strong brand value: In 2020, 61% of our revenue was generated outside North America. Because our online platform is available globally, curious learners and organizations can easily test our content. As these new learners and organizations begin to engage with us, we then have the opportunity to quickly and efficiently expand into these new markets by focusing our marketing, advertising, pricing, and language customization resources and expanding our payment options, which in turn allows us to grow our base of individual learners and organizations on an ongoing basis and attract new instructors who create native language courses.

Robust content generation engine:

 

   

Premium quality: Our platform encourages instructors to react constantly to learner feedback by continuously updating their courses. This continuous updating, along with personalized recommendations and advanced search capabilities, provides learners with the most up-to-date, high-quality, and relevant content.

 

   

Relevance and speed to market: Our marketplace model motivates instructors to provide relevant content to learners quickly, in order to gain a “first-mover” advantage in attracting learners and enrollments to their courses. We believe these structural inducements, coupled with our aligned incentive model, help drive our instructors to update their courses at a much higher rate than courses offered through competitors with a traditional publisher model. For example, 60% of courses in the UB course catalog were updated in 2020.

 

   

Breadth of content: Many of our competitors offer limited course catalogs specializing in a specific category. We provide access to over 158,000 courses (14,820 of which are offered for free), including over 56,000 courses in languages other than English. We also offer a broad set of personal enrichment courses in the Wellness, Music, and Lifestyle categories, among others. On average, instructors publish more than 5,000 courses a month on the Udemy platform.

 

   

Affordability: Our ML pricing algorithms constantly analyze supply and demand for each content category, topic, and course on our platform to help us determine an optimal price on a per-country basis. This helps us understand individual learner willingness to pay, optimize overall pricing, and adjust prices when necessary to maximize overall revenue while maintaining competitive pricing.

Self-reinforcing flywheel with powerful network effects: We believe the growing number of individual learners and organizations on our platform attracts instructors who recognize that our platform and global audience can create new income streams and help support their families and local communities. In turn, the increasing number of relevant, high-quality, and up-to-date courses offered by world-class experts and practitioners attracts more individual learners and organizations.


 

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Our direct-to-consumer offering is synergistic with UB. As individual learners experience the quality and benefits of Udemy’s platform, they recommend Udemy to their organizations. We have been very successful at driving high-converting leads to UB, with over half of leads coming from our direct-to-consumer platform in 2020.

Powerful data insights and analytics: With over 1.2 billion unique visitors, more than 486 million course enrollments, and in 2020 alone, almost 11 billion minutes of learning, we believe that the volume of the data our platform collects provides meaningful insights into the behaviors and needs of our learners and instructors. We leverage that data to provide personalization for learners as well as to promote high-quality and relevant content from instructors.

We capture user behavioral data on the learning objectives and interests of our learners to better address their needs and recommend the right courses. We also analyze enrollment data, market insights, and feedback from learners to identify new topics of focus within our content catalog. We share this information with our instructors in real time so they can improve their course offerings.

Flexible technology platform: Our technology platform is modern, agile, accessible from a variety of online and mobile channels, and built to scale with our global growth. We use advanced technology applications such as personalized promotions, lifecycle marketing, and content personalization, to help tailor our platform for our learners.

Our platform’s ability to provide a personalized experience is further enhanced by the ML methodologies used to develop the algorithms included in our technology, which allows us to continuously and automatically personalize each learner’s experience. We regularly run tests to determine which product features, course recommendations, prices, and messaging will drive the best outcomes for our learners and Udemy as a whole. In addition, we have built our technology to be flexible to enable us to continuously test and add new features, such as interactive exercises and immersive learning experiences.

Our growth strategies

We are still in the early stages of our long-term growth strategy. We expect to continue expanding our consumer and UB customer base, instructor network, and content catalog while increasing our market opportunities through the following strategies:

Accelerate the growth of our enterprise business through:

 

   

Successfully executing on our land-and-expand strategy: Our strategy focuses on acquiring new customers and efficiently growing our relationships with existing customers, beginning with either individual users or departmental deployments. Historically, we have expanded from individual to department to multi-department sales as UB’s value is proven and UB customers identify additional use cases. With fewer than 10% of total available seats contracted in our customer base, we consequently see a large opportunity for growth. We intend to continue to expand our sales team footprint globally and to improve our upselling tactics with the assistance of better tools and systems. We have also developed a strong outbound lead-generation process with effective account-based marketing operations, allowing us to target, develop, and nurture key accounts in large organizations.

 

   

Improving quality and relevance of our courses: We curate our UB catalog by selecting the highest-rated and most engaging courses from our consumer business. We intend to continue leveraging our large platform to source high-quality and relevant curricula. We will also continue to improve the speed and efficiency of our curation processes, enabling us to quickly discern the content most relevant to our UB customers.


 

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Integrating our UB offering with employees’ workflow: We provide easy-to-implement learning playbooks, which enable customers to combine UB courses with their own in-house training to create blended learning programs. UB learners can also take advantage of our personalized content recommendations, which we derive from the data we collect. We currently integrate with existing employee learning-and-development and HR workflows, including our customers’ learning management systems and learning experience platforms, to help enable a more robust offering for UB learners and greater employer visibility into learning. Examples of these integrations include Workday, SAP SuccessFactors, Slack, and ServiceNow. Integrations enable UB customers to incorporate learning in the flow of work: learners can discover, search, and consume our UB catalog. Leaders can sync, track, and report learning progress for employees across other HR systems and also encourage learning across the organization through reminders and sharing on existing company messaging platforms. Looking forward, we intend to expand our offering to integrate with additional employee learning-and-development and HR workflows, and to introduce additional services for employees, thus expanding usage within our UB customers.

 

   

Deliver immersive learning experiences: Our platform currently offers powerful learning experiences including practice tests, coding exercises, and quizzes, which permit learners to prepare for certification exams and better retain what they have learned. We intend to expand our offerings to include deeper skills assessments, labs, and cohort-based learning. We will also consider acquisitions to expand the immersive learning experiences we offer, with a goal of improving learner outcomes and ultimately increasing retention.

Increase learner retention through:

 

   

Building a global personalization engine: Since the beginning of 2020, we have invested considerable resources in developing a personalization-based technology platform, which includes our:

 

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State-of-the-art eventing platform to track and store every learner interaction with our site and apps;

 

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Customer data platform to structure and analyze all of our learner data;

 

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Lifecycle marketing platform to develop, train, and operationalize personalization algorithms; and

 

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Campaign management platform to link personalization algorithms with customer-facing touch-points, such as website placements, emails, and push notifications among others.

Our personalization efforts are only beginning. We believe that these investments will yield high returns around customer engagement, retention, and lifetime value in the quarters and years to come.

 

   

Expanding our subscription offering: In early 2021, we launched a direct-to-consumer subscription, currently in beta testing. We believe there is broad demand for learning subscriptions, and we are uniquely positioned to provide a compelling and highly competitive product. We believe that consumer subscriptions, in the absence of employer-sponsored access, will increase the retention of individual learners who seek to continuously acquire new skills and value greater ongoing access to content. Offering different subscription packages based on area of expertise or added features, for example, will allow us to capture different types of individual learners at different price points, all while increasing their engagement with Udemy.

Expand our geographic footprint through:

 

   

Organic expansion: All of our courses are discoverable everywhere in the world. We enter new countries via courses taught in English. As the platform grows in popularity, local instructors create courses in their native languages. In 2020, we offered over 56,000 courses in languages other than English. We will continue to invest in our technology and our brand to drive search engine optimization and word of mouth in order to continue the organic growth.


 

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Executing our international playbook: As the content catalog expands in each country, we start investing in additional growth levers such as local payment methods, local currency pricing, and local marketing. These investments drive higher traffic, enrollments, revenue, and leads for UB. Once we reach a steady volume of leads to UB, we build in-country go-to-market sales teams to grow and expand our customer base. We also may partner with local companies. This international playbook will continue to allow us to build a targeted list of countries in which we anticipate we will expand with a high likelihood of success.

Risk factors summary

Our business is subject to a number of risks and uncertainties of which you should be aware before deciding to invest in our common stock. These risks are more fully described in “Risk factors” immediately following this prospectus summary. These risks include, among others, the following:

 

   

We have a history of losses, and we may not be able to generate sufficient revenue to achieve or maintain profitability in the future. We incurred net losses of $69.7 million and $77.6 million during the years ended December 31, 2019 and 2020, respectively, and, as of December 31, 2020, we had an accumulated deficit of $378.5 million.

 

   

We have a limited history in an emerging and dynamic market, which makes it difficult to evaluate our prospects and future results of operations.

 

   

Our results of operations may fluctuate significantly from period to period due to a wide range of factors, which makes our future results difficult to predict.

 

   

Our rapid growth may not be sustainable and depends on our ability to attract new learners, instructors, and organizations and retain existing ones.

 

   

Our platform relies on a limited number of instructors who create a significant portion of the most popular content on our platform, and the loss of these instructor relationships could adversely affect our business, financial condition, and results of operations.

 

   

If we fail to maintain and expand our relationships with UB customers, our ability to grow our business and revenue will suffer.

 

   

We operate in a highly competitive market, and we may not be able to compete successfully against current and future competitors.

 

   

The market for online learning solutions is relatively new and may not grow as we expect, which may harm our business, financial condition, and results of operations.

 

   

Adherence to our values and our focus on long-term sustainability may negatively impact our short- or medium-term financial performance.

 

   

The COVID-19 pandemic could affect our business, financial condition, and results of operations in volatile and unpredictable ways.

 

   

Any failure to successfully execute and integrate future acquisitions could materially adversely affect our business, financial condition, and results of operations.

 

   

Changes in laws or regulations relating to privacy, data protection, or cybersecurity, including those relating to the protection or transfer of data relating to individuals, or any actual or perceived failure by us to comply with such laws and regulations or any other obligations could adversely affect our business.

 

   

We may be unable to adequately obtain, maintain, protect, and enforce our intellectual property and proprietary information, which could adversely affect our business, financial condition, and results of operations.


 

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We could face liability, or our reputation might be harmed, as a result of courses posted to our platform.

 

   

Intellectual property litigation, including litigation related to content available on our platform, could result in significant costs and adversely affect our business, financial condition, results of operations, and reputation.

 

   

We are an emerging growth company, and any decision to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

   

The trading price of our common stock may be volatile, and you could lose all or part of your investment.

Corporate information

We were incorporated in January 2010 as a Delaware corporation. Our principal executive offices are located at 600 Harrison Street, 3rd Floor, San Francisco, California 94107, and our telephone number is (415) 813-1710. Our website address is www.udemy.com. Information contained on, or that can be accessed through, our website does not constitute part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only. Investors should not rely on any such information in deciding whether to purchase our common stock.

“Udemy,” our logo, and our other registered or common law trademarks, service marks, or trade names appearing in this prospectus are the property of Udemy, Inc. Other trademarks and trade names referred to in this prospectus are the property of their respective owners.

Implications of being an emerging growth company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of our initial public offering. As a result of this status, we have taken advantage of reduced reporting requirements in this prospectus and may elect to take advantage of other reduced reporting requirements in our future filings with the Securities and Exchange Commission. In particular, in this prospectus, we have provided only two years of audited consolidated financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have elected to use this extended transition period to enable us to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with the new or revised accounting standards as of public company effective dates.


 

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The offering

 

Common stock offered by us

                shares.

 

Option to purchase additional shares

We have granted the underwriters an option for a period of 30 days to purchase up to                 additional shares of our common stock.

 

Common stock to be outstanding immediately after this offering

                shares (or                 shares if the underwriters exercise their option to purchase additional shares in full).

 

Use of proceeds

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock, and enable access to the public equity markets for us and our stockholders. We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire or invest in businesses, products, services, or technologies. However, we do not have agreements or commitments for any material acquisitions or investments at this time. See “Use of proceeds” for additional information.

 

Risk factors

See “Risk factors” for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

 

Proposed trading symbol

“UDMY”

The number of shares of our common stock to be outstanding after this offering is based on 121,018,841 shares of our common stock outstanding as of December 31, 2020, and excludes:

 

   

18,932,979 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2020 with a weighted-average exercise price of $5.23 per share, which excludes 95,475 stock appreciation rights outstanding that will be settled in cash upon exercise;

 

   

3,917,161 shares of common stock reserved for future issuance under our 2010 Equity Incentive Plan, as amended, or our 2010 Plan, as of December 31, 2020, provided that we will cease granting awards under our 2010 Plan upon the effectiveness of our 2021 Equity Incentive Plan, or our 2021 Plan;

 

   

12,595 warrants to purchase shares of our redeemable convertible preferred stock outstanding as of December 31, 2020 with a weighted-average exercise price of $0.196 per share, which were fully exercised in January 2021;

 

   

                 shares of common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with this offering; and

 

   

                 shares of common stock reserved for future issuance under our 2021 Employee Stock Purchase Plan, or our 2021 ESPP, which will become effective in connection with this offering.

Our 2021 Plan and our 2021 ESPP each will provide for annual automatic increases in the number of shares reserved thereunder, and our 2021 Plan will also provide for increases to the number of shares that may be granted thereunder based on awards under our 2010 Plan that expire, are forfeited, or otherwise repurchased by us, as more fully described in “Executive compensation—Employee benefit and stock plans.”


 

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Unless otherwise indicated, this prospectus assumes or gives effect to the following:

 

   

no exercise of outstanding options or stock warrants;

 

   

no exercise by the underwriters of their option to purchase additional shares of common stock from us in this offering;

 

   

the automatic conversion of all outstanding shares of our redeemable convertible preferred stock as of December 31, 2020 into an aggregate of 85,391,338 shares of our common stock immediately prior to the completion of this offering; and

 

   

the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering.


 

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Summary consolidated financial and other data

The following tables summarize our consolidated financial and other data for the periods and as of the dates indicated. We have derived our summary consolidated statements of operations data for the years ended December 31, 2019 and 2020, and consolidated balance sheet data as of December 31, 2020, from our audited consolidated financial statements appearing elsewhere in this prospectus. You should read the following summary consolidated financial and other data together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus and the information in “Selected consolidated financial and other data” and “Management’s discussion and analysis of financial condition and results of operations.”

 

     Year ended December 31,  
             2019                          2020              
     (in thousands, except share and
per share amounts)
 
Consolidated statements of operations data:      
Revenues    $ 276,327       $ 429,899   
Cost of revenues(1)      143,510         209,253   
  

 

 

    

 

 

 
Gross profit      132,817         220,646   
  

 

 

    

 

 

 
Operating expenses:      

Sales and marketing(1)

     126,436         192,600   

Research and development(1)

     34,379         50,643   

General and administrative(1)

     40,033         50,783   
  

 

 

    

 

 

 

Total operating expenses

     200,848         294,026   
  

 

 

    

 

 

 
Operating loss      (68,031)        (73,380)  
Other income (expense), net:      

Interest income (expense), net

     87         (1,146)  

Other income (expense), net

     (384)        55   
  

 

 

    

 

 

 

Total other income (expense), net

     (297)        (1,091)  
  

 

 

    

 

 

 
Net loss before taxes      (68,328)        (74,471)  
Income tax provision      (1,375)        (3,149)  
Net loss      (69,703)        (77,620)  
  

 

 

    

 

 

 
Net loss per share attributable to common stockholders, basic and diluted(2)    $ (2.57)      $ (2.33)  
  

 

 

    

 

 

 
Weighted-average shares used to calculate net loss per share attributable to common stockholders—basic and diluted(2)              27,096,379                 33,384,438   
  

 

 

    

 

 

 
Pro forma net loss per share attributable to common stockholders—basic and diluted(2)      
     

 

 

 
Weighted-average shares used to compute pro forma net loss per share attributable to common stockholders—basic and diluted(2)      
     

 

 

 

 

(1)

Stock-based compensation expense included in the consolidated statements of operations data above was as follows:

 

     Year Ended December 31,  
               2019                            2020              
Cost of revenues    $ 299       $ 418   
Sales and marketing      3,001         7,518   
Research and development      2,357         5,232   
General and administrative      3,306         18,450   
  

 

 

    

 

 

 
Total stock compensation expense    $ 8,963       $ 31,618   
  

 

 

    

 

 

 

 

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(2)

See Note 2 and Note 14 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our net loss per share attributable to common stockholders, basic and diluted and the weighted-average shares used to compute these amounts. Pro forma basic net loss per share attributable to common stockholders, basic and diluted is computed to give effect to the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 85,391,338 shares of common stock immediately prior to the completion of this offering. Incremental stock-based compensation incurred in connection with the completion of this offering is immaterial.

 

     As of December 31, 2020
     Actual                Pro forma(1)   Pro forma    

as adjusted(2)(3)    

               
          (in thousands)    
Consolidated balance sheet data:              
Total current assets        236,964         
Total assets        282,096         
Total current liabilities        263,813         
Total liabilities        268,677         
Redeemable convertible preferred stock        274,104         
Additional paid-in capital        117,818         
Accumulated deficit        (378,503 )         

 

(1)

The pro forma balance sheet data gives effect to the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 85,391,338 shares of our common stock which will occur immediately prior to the completion of this offering, resulting in an aggregate of 121,018,841 outstanding shares of our common stock. Incremental stock-based compensation incurred in connection with the completion of this offering is immaterial.

 

(2)

The pro forma as adjusted column in the balance sheet data table above gives effect to (a) the pro forma adjustments described in footnote (1) above and (b) the issuance and sale of                  shares of common stock in this offering at the assumed initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(3)

Each $1.00 increase or decrease in the assumed initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the pro forma as adjusted amount of each of our cash and cash equivalents, total assets and stockholders’ deficit by $                 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price would increase or decrease, as applicable, each of our cash and cash equivalents, total assets, and stockholders’ deficit by $                 million. The pro forma as adjusted information set forth above is illustrative only and will depend on the actual initial public offering price and other terms of this offering determined at pricing.


 

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Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our consolidated financial statements and the related notes and “Management’s discussion and analysis of financial condition and results of operations,” before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations, and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

Risks related to our business and operations

We have a history of losses, and we may not be able to generate sufficient revenue to achieve or maintain profitability in the future.

We incurred net losses of $69.7 million and $77.6 million during the years ended December 31, 2019 and 2020, respectively, and, as of December 31, 2020, we had an accumulated deficit of $378.5 million. We expect our losses to continue as we make significant investments towards growing our business and operating as a public company. We have invested, and expect to continue to invest, substantial financial and other resources in developing our platform, including expanding our platform offerings, developing or acquiring new platform features and services, expanding into new markets and geographies, and increasing our sales and marketing efforts. These expenditures will make achieving and maintaining profitability more difficult, and these efforts may also be more costly than we expect and may not result in increased revenue or growth in our business. Any failure to increase our revenue sufficiently to keep pace with our investments and other expenses could prevent us from achieving or maintaining profitability or positive cash flow on a consistent basis. As a result, we can provide no assurance as to whether or when we will achieve profitability. If we are not able to achieve and maintain profitability, the value of our company and our common stock could decline significantly, and you could lose some or all of your investment.

We have a limited history and operate in an emerging and dynamic market, which makes it difficult to evaluate our prospects and future results of operations.

We commenced operations in 2010 and the market for online learning solutions is relatively new. These factors may make it difficult to accurately assess our future prospects and the risks, challenges, and uncertainties that we may encounter. These risks include:

 

   

maintaining and increasing a base of learners, instructors, and UB customers using our platform;

 

   

successfully competing with existing and future participants in the market for online learning solutions;

 

   

successfully expanding our business in existing markets and entering new markets and geographies;

 

   

anticipating and responding to market and broader economic conditions;

 

   

avoiding interruptions or disruptions in the service of our platform;

 

   

accurately forecasting our revenue and operating expenses on a quarterly and annual basis;

 

   

maintaining and enhancing the value of our reputation and brand;

 

   

attracting, hiring, and retaining qualified personnel to manage our operations and further develop our platform;

 

   

effectively managing rapid growth in our operations, including personnel; and

 

   

successfully implementing and executing our business strategies.

 

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Additionally, because we have limited historical financial data and operate in a rapidly evolving market, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more established and predictable market. We have encountered in the past, and will encounter in the future, risks, challenges, and uncertainties frequently experienced by growing companies. If our assumptions regarding any of these risks, challenges, or uncertainties, which we use to plan and operate our business, are incorrect or change, or if we do not address them successfully, our results of operations could differ materially from our expectations and our business, financial condition, and results of operations could be adversely affected.

Our results of operations may fluctuate significantly from period to period due to a wide range of factors, which makes our future results difficult to predict.

Our results of operations have historically varied from period to period, and we expect that our results of operations will continue to vary significantly from quarter to quarter and year to year because of a variety of factors, many of which are outside of our control. As a result, comparing our results of operations on a period-to-period basis may not be meaningful. Factors that may contribute to the variability of our quarterly and annual results include, but are not limited to:

 

   

our ability to attract and retain learners, instructors, and enterprises that use our platform in a cost-effective manner;

 

   

our ability to accurately forecast revenue and operating expenses;

 

   

the effects of increased competition on our business;

 

   

our ability to successfully expand in existing markets and successfully enter new markets;

 

   

changes in learner or customer behavior with respect to online learning solutions;

 

   

increases in marketing, sales, and other operating expenses that we may incur to grow and acquire new learners, instructors, and customers;

 

   

the revenue mix between our consumer and UB offerings;

 

   

the impact of worldwide economic conditions, including the resulting effect on consumer and business spending on online learning solutions;

 

   

our ability to maintain an adequate rate of growth and effectively manage that growth;

 

   

the effects of changes in search engine placement and prominence;

 

   

our ability to keep pace with technology changes in our industry;

 

   

the success of our sales and marketing efforts;

 

   

our ability to protect, maintain, and enforce our intellectual property rights;

 

   

costs associated with defending claims, including intellectual property infringement claims, and related judgments or settlements;

 

   

changes in governmental or other regulations affecting our business;

 

   

interruptions in service and any related impact on our business, reputation, or brand;

 

   

the attraction and engagement of qualified employees and key personnel;

 

   

our ability to choose and effectively manage third-party service providers;

 

   

the effects of natural or man-made catastrophic events;

 

   

the impact of a pandemic or an outbreak of disease or similar public health concern, such as the COVID-19 pandemic, or fear of such an event;

 

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potential volatility in our gross margins, including due to revenue mix shifts between our enterprise and consumer segments, changes in our pricing policies, increased use of subscriptions in our consumer segment, and timing differences between recognition of revenue and related content costs for courses;

 

   

the effectiveness of our internal controls over financial reporting;

 

   

the impact of payment processor costs and procedures; and

 

   

changes in our tax rates or exposure to additional tax liabilities.

The unpredictability of our results of operations could cause our results to vary from period to period or to fall below expected levels for a given period, which will adversely affect our business, financial condition, and results of operations.

Our rapid growth may not be sustainable and depends on our ability to attract new learners, instructors, and organizations and retain existing ones.

Our success depends, in part, on growing the number of learners and instructors engaging with our platform. We believe the increase in the number of instructors increases the quality and quantity of the content available on our platform, in turn making our platform more appealing and engaging to learners in both our consumer and enterprise segments. This increase in learners then attracts more instructors to our platform. This dynamic marketplace model takes time to build and may grow at a slower pace than we expect. In addition, although the number of individual and UB learners and instructors engaging with our platform has grown in recent years, there can be no assurance that this growth will continue at its current pace or at all. For example, in 2020, we experienced a significant increase in engagement with our platform, in part as a result of the COVID-19 pandemic and the shelter in place orders and other efforts that were deployed by governments to mitigate its spread. While the COVID-19 pandemic may be accelerating an ongoing, long-term shift towards online learning, in the short term this level of demand from learners, instructors and organizations may decline as vaccines become more widely distributed and government restrictions are lifted. If we fail to grow or maintain the number of learners and instructors engaging with our platform, the value of our platform will diminish and our revenue will decline.

We believe that many of our new learners find us by word of mouth and other non-paid referrals from existing learners. If existing learners are dissatisfied with their experience on our platform, they may stop accessing our content and referring others to us. Likewise, if existing learners do not find our content appealing and engaging, whether because of a negative experience with, declining interest in or relevancy of the content, they may stop referring others to us. In turn, if instructors perceive that our platform lacks an adequate learner audience, instructors may be less willing to provide content for our platform, and the experience of learners could be further negatively impacted. The willingness or ability of instructors to provide content for our platform could also be negatively impacted by other factors, such as:

 

   

complaints or negative publicity about us or our platform, even if factually incorrect or based on isolated incidents;

 

   

changes to our terms and policies that our instructors find, or even perceive, to be unpopular or that are not clearly articulated to them; or

 

   

our failure to enforce our policies fairly and transparently.

In addition, the costs associated with retaining learners and instructors are substantially lower than those associated with acquiring new learners and instructors. As a result, if we are unable to retain existing learners and instructors, even if such losses are offset by an increase in revenue resulting from new learners and instructors, it could have a material adverse effect on our results of operations. Consequently, if we are unable to retain existing learners and instructors and attract new learners and instructors who contribute and engage with our platform, our growth prospects would be harmed and our business, financial condition, and results of operations could be adversely affected.

 

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Our platform relies on a limited number of instructors who create a significant portion of the most popular content on our platform, and the loss of these instructor relationships could adversely affect our business, financial condition, and results of operations.

As part of our instructor community, we strive to build meaningful connections with instructors, ranging from those that are well known and have created extensively to those that have just begun the process of creating courses. As of December 31, 2020, we had relationships with over 56,000 instructors. Although we view the breadth and diverse expertise of our instructor base and the content they create as one of our competitive advantages, a significant portion of the most popular content on our platform, and as a result a significant portion of our revenue, is attributable to a limited number of our instructors.For example, in 2020, 51% of our total enrollments were driven by 5% of our instructors. Moreover, because instructors may unpublish content or leave the Udemy platform altogether, subject to our right to continue offering such content to new learners on the consumer marketplace for 60 days afterwards and in our subscription offerings for 12 months afterwards, we may need to source replacement content by a different instructor on short notice. Although we do not believe the loss of any one of these instructors would materially impact our business, the loss of multiple existing instructors, as well as any failure to attract additional instructors, could negatively impact our business, financial condition and results of operations by adversely affecting our ability to provide high-quality, engaging, and relevant content for one or more subject matters and the pace at which we provide such content, which in turn could reduce the attractiveness of our platform to learners and customers.

If we fail to maintain and expand our relationships with UB customers, our ability to grow our business and revenue will suffer.

Revenue from our enterprise segment represented 18% and 24% of our revenue during the fiscal years ended December 31, 2019 and 2020, respectively, and we believe that our future success depends, in part, on our ability to grow this offering, both by retaining and expanding our relationship with existing customers and attracting new customers. Many customers initially use our platform within specific groups or departments within their organizations, or for specific use cases. Our ability to grow our UB business depends, in part, on our ability to persuade these customers to expand their use of our platform to address additional use cases. Further, to continue to grow our business, it is important that our customers renew their subscriptions when existing contracts expire and that we expand our relationships with our existing customers. Customers have no obligation to renew their subscriptions, and they may decide not to renew their subscriptions with a similar contract period, at the same prices and terms, with the same or a greater number of users, or at all. We have had some customers elect not to renew their subscriptions with us in the past, and it is difficult to accurately predict whether we will have future success in retaining customers or expanding our relationships with them. We have experienced significant growth in the number of customers subscribing to our UB offerings, but we do not know whether we will continue to achieve similar growth, or achieve any growth at all, in the future. Our ability to retain UB customers and expand our deployments with them may decline or fluctuate as a result of a number of factors, including customers’ satisfaction with our platform, the quality and timeliness of our customer success and customer support services, our prices, the prices and features of competing solutions, reductions in customers’ spending levels, insufficient adoption of our platform by our customers’ constituents, and new feature releases. If customers do not purchase additional subscriptions or renew their existing subscriptions, renew on less favorable terms, or fail to continue to expand their engagement with us, our revenue may decline or grow less quickly than anticipated, which would harm our business, financial condition, and results of operations.

We operate in a highly competitive market, and we may not be able to compete successfully against current and future competitors.

We operate in a highly competitive environment, as the market for online learning is relatively new, highly fragmented, and rapidly evolving, with limited barriers to entry. We compete for learners, enterprise customers, and instructors:

 

   

Learners: We compete for learners based on our course catalog, instructors, and learning tools.

 

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UB customers: We compete for customers based on our up-to-date content, the breadth and depth of that content across the full range of core business functions, and advanced product features that optimize self-paced learning and enable organizations to effectively drive programmatic learning.

 

   

Instructors: We compete for instructors based on our ability to promote monetization opportunities.

Our competition includes corporate training offerings (such as those from Pluralsight, Skillsoft, and LinkedIn Learning), direct-to-consumer training offerings (such as those from Coursera and edX), specialized content training offerings (such as those from A Cloud Guru and Skillshare), and free online resources used to gather and share knowledge and skills.

We expect our existing competitors and new entrants to the online learning market to continually evolve and improve their business models. If these or other market participants introduce new or improved delivery of online education and technology-enabled services that are more compelling or widely accepted than ours, our ability to grow our revenue and achieve profitability could suffer. Several new and existing companies in the online education industry provide or may provide offerings similar to what we offer on our platform, and, despite any exclusivity arrangements we have with our instructors, these companies may nonetheless pursue relationships with our instructors that may reduce, or stop altogether, the content our instructors produce for our platform. In addition, customers may choose to continue using or develop their own online learning or training solutions in-house rather than pay for our platform.

We believe that our competitiveness depends on a range of factors, both within and beyond our control, including:

 

   

the availability or development of alternative online learning platforms that are more compelling to learners, instructors, or organizations than ours;

 

   

changes in pricing policies and terms offered by our competitors or by us;

 

   

the ability to adapt to new technologies and changes in requirements of our learners, instructors, and UB customers;

 

   

costs associated with acquiring and retaining learners, instructors, and UB customers;

 

   

the ability of our current and future competitors to establish relationships with customers; and

 

   

industry consolidation and the number and rate of new entrants.

Current and potential competitors (including any new entrants into the market) may enjoy substantial competitive advantages over us, such as greater name recognition, longer operating histories, market- or industry-specific knowledge, more successful marketing capabilities, and substantially greater financial, technical, and other resources than we have. Our current or new competitors may adopt certain aspects of our business model, which could reduce our ability to differentiate our services. Furthermore, online educational content is not typically marketed exclusively through any single channel and, accordingly, our competitors could aggregate a set of online learning courses similar to ours. Competition may intensify as our competitors raise additional capital or as new participants, including established companies, enter the markets in which we compete. Our ability to grow our business and achieve profitability could be impaired if we cannot compete successfully.

The market for online learning solutions is relatively new and may not grow as we expect, which may harm our business, financial condition, and results of operations.

Our future success will depend in part on the growth, if any, in the demand for online learning solutions. Although the COVID-19 pandemic has accelerated the demand for online learning solutions from both individuals and businesses alike, the online learning market is less mature than the market for in-person instruction and continues to evolve rapidly. There can be no assurance that the heightened levels of demand for online learning solutions experienced during the COVID-19 pandemic will continue as the effects of the pandemic, such as limitations on

 

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in-person activities, abate. Consequently, it is difficult to predict demand for and continued use of our platform by learners, instructors, and UB customers, the rate at which existing learners and instructors expand their engagement with our platform, the size and growth rate of the market for our platform, the entry of competitive offerings into the market, or the success of existing competitive offerings. Furthermore, even if learners or UB customers want to adopt an online learning solution, it may take them a substantial amount of time to fully transition to this type of learning solution or they could be delayed due to budget constraints, weakening economic conditions, or other factors. Even if market demand for online learning solutions generally increases, we cannot assure you that adoption of our platform will also increase. If the market for online learning solutions does not grow as we expect or our platform does not achieve widespread adoption, it could result in reduced learner and customer spending, reduced engagement from instructors, attrition by learners, instructors, and UB customers, and decreased revenue, any of which would adversely affect our business, financial condition, and results of operations.

Adherence to our values and our focus on long-term sustainability may negatively impact our short- or medium-term financial performance.

Our values motivate everything we do, and we accordingly intend to focus on the long-term sustainability of our business and platform. We may take actions that we believe will benefit our business and our ecosystem and, therefore, our stockholders over a period of time, even if those actions do not maximize short- or medium-term financial results. However, these longer-term benefits may not materialize within the timeframe we expect or at all. For example:

 

   

we may choose to prohibit certain content from our platform that we believe is inconsistent with our values even though we could benefit financially from the sale of that content;

 

   

we may choose to revise our policies in ways that we believe will be beneficial to our learners, instructors, and UB customers in the long term even though the changes are perceived unfavorably among our existing learners, instructors, and customers; or

 

   

we may take actions, such as locating our servers in low-impact data centers, that reduce our environmental footprint even though these actions may be more costly than other alternatives.

The COVID-19 pandemic could affect our business, financial condition, and results of operations in volatile and unpredictable ways.

In March 2020, the World Health Organization declared that the outbreak of COVID-19 was a global pandemic. To limit the spread of the virus, governments have imposed various restrictions, including emergency declarations at the federal, state, and local levels, school and business closings, quarantines, “shelter at home” orders, restrictions on travel and trade, limitations on social or public gatherings, and other social distancing measures.

The full extent of the impact of the pandemic on our business, financial condition, and results of operations depends on future developments that are uncertain and unpredictable, including the duration and scope of the pandemic (including any potential future waves of the pandemic domestically and globally); governmental, business, and individual actions that have been and continue to be taken in response to the pandemic, including the availability, adoption, and effectiveness of COVID-19 vaccines; the effect on our learners, instructors, and UB customers; disruptions or restrictions on our employees’ ability to work and travel; the availability and cost to access capital markets; and interruptions related to our cloud networking and mobile app infrastructure that impact our learners, instructors, and customers. We have taken precautionary measures intended to help minimize the risk of COVID-19 to our employees, including transitioning the majority of our employees to remote work and restricting business travel. As we continue to actively monitor issues arising from the COVID-19 pandemic, we may take further actions that alter our business operations, including as may be required by federal, state, local, or foreign authorities or that we determine are in the best interests of our employees, learners, instructors, UB customers, business partners, and stockholders.

 

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We have also seen significant and rapid shifts in the traditional models of education and training as the COVID-19 pandemic has progressed. Although we believe the COVID-19 pandemic has increased the need or willingness of businesses, governments, institutions, and individuals to adopt remote, online, and asynchronous learning and training, we cannot predict whether this trend will continue as the pandemic subsides, restrictions ease and the risk and barriers associated with in-person learning and training decrease. Learners and UB customers may choose to revert to more traditional, in-person learning and training solutions following the pandemic, which could adversely affect the demand for our platform and our revenue. In addition, the COVID-19 pandemic may negatively impact the financial resources available to learners and UB customers, which could in turn negatively impact our business, financial condition, and results of operations.

We may need to change our pricing model for our platform’s offerings, which in turn could adversely impact our results of operations.

We have in the past, and expect that we may in the future, need to change our pricing model or target contract length from time to time, which could impact our financial results. As the market for our learning platform develops, as new competitors introduce competitive applications or services, or as we enter into new international markets, we may be unable to attract new learners or UB customers at the same price or based on the same pricing models we have historically used, or for contract lengths consistent with our historical averages. In addition, as we develop and roll out new products, such as our recently launched consumer subscription model, or improve existing ones, we will need to develop pricing and contract models for these products that appeal to consumer learners over time, and we may not be successful in doing so. Pricing and contract length decisions may also impact the mix of adoption among our offerings and negatively impact our overall revenue. Moreover, competition may require us to make substantial price concessions. Our results of operations may be adversely affected by any of the foregoing, and we may have increased difficulty achieving or maintaining profitability.

Failure to effectively expand our sales and marketing capabilities could harm our ability to increase our base of learners and UB customers and achieve broader market acceptance.

Our ability to broaden our base of both consumer learners and UB customers, and achieve broader market acceptance of our marketplace platform, will depend to a significant extent on the ability of our sales and marketing organizations to work together to drive our sales pipeline and cultivate customer relationships. Our marketing efforts include the use of search engine optimization, paid search, email marketing, and television.

We have invested in and plan to continue expanding our sales and marketing organizations, both domestically and internationally. Identifying, recruiting, and training sales personnel will require significant time, expense, and attention. If we are unable to hire, develop, and retain talented sales or marketing personnel, if our new sales or marketing personnel are unable to achieve desired productivity levels in a reasonable period of time (including as a result of working remotely in connection with the COVID-19 pandemic), or if our sales and marketing programs are not effective, our ability to broaden our customer base and achieve broader market acceptance of our platform could be harmed. In addition, the investments we make in our sales and marketing organizations will occur in advance of experiencing benefits from such investments, making it difficult to determine in a timely manner if we are efficiently allocating our resources in these areas.

If we fail to effectively adapt and respond to rapidly changing technology, evolving industry standards, and changing customer needs or requirements, our platform may become less competitive.

The markets in which we compete are and will continue to be characterized by constant change and innovation. Our success is predicated on our ability to identify and anticipate the needs of learners, instructors, and UB customers and design a scalable learning experience platform that allows them to easily create and access high-quality, in-demand educational content. Our ability to attract new and retain existing learners, instructors and UB customers to our platform, and to deepen their relationships with our platform, depends in large part on our ability to continue improving and enhancing our offerings.

 

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We may experience difficulties with software development that could delay or prevent the development, introduction or implementation of platform modifications and enhancements. Software development involves a significant amount of time for our technology team, as it can take developers months to update, code, and test new and upgraded features and integrate them into our platform. We must also continually update, test, and enhance our platform. The continual improvement and enhancement of our platform requires significant investment and we may not have the resources to continue making these investments. Further, there can be no assurance that the platform modifications and enhancements in which we invest will result in additional revenue sufficient to cover the cost of developing those modifications and enhancements, if any. If we are not able to improve and enhance our platform in an effective manner, our business, financial condition, and results of operations will be adversely affected.

If we are not able to maintain and enhance our brand, our reputation and business may suffer.

We believe that maintaining and enhancing our reputation and brand recognition is critical to our ability to attract and retain learners, instructors, UB customers, and partners, and that the importance of our reputation and brand recognition will continue to increase as competition in the markets in which we operate continues to develop. Our success in this arena will depend on a range of factors, both within and beyond our control. Factors affecting our reputation and brand recognition that are within our control include our ability to:

 

   

market our platform effectively and efficiently;

 

   

maintain a useful, innovative, and reliable platform;

 

   

maintain a high satisfaction among learners, instructors, and UB customers;

 

   

provide a high quality and perceived value for our platform;

 

   

successfully differentiate our platform from competing offerings;

 

   

maintain a consistently high level of customer service; and

 

   

prevent any actual or perceived data breach or data loss, or misuse or perceived misuse of our platform.

Additionally, our reputation and brand recognition may be affected by factors that are beyond our control, such as:

 

   

the actions of competitors or other third parties;

 

   

the quality and quantity of, as well as the nature and subject matter of, content available from instructors on our platform;

 

   

positive or negative publicity, including with respect to events or activities attributed to us, our employees, instructors, or our commercial partners;

 

   

interruptions, delays, or attacks on our platform; and

 

   

litigation or legal developments.

Damage to our reputation and brand, from the factors listed above or otherwise, may reduce demand for our platform and have an adverse effect on our business, operating results and financial condition. Moreover, any attempts to rehabilitate our reputation and brand recognition may be costly and time-consuming, and there can be no assurance that any such efforts will ultimately be successful.

We could face liability, or our reputation might be harmed, as a result of courses posted to our platform.

Instructors at times post courses and related materials to our platform that contain content owned by third parties. While our Terms of Use, Instructor Terms, and Trust & Safety policies require instructors to respect the intellectual property rights of others, the laws governing the fair use of these third-party materials are imprecise and adjudicated on a case-by-case basis, which makes it challenging to adopt and implement appropriately

 

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balanced institutional policies governing these practices. As a result, we are subject to potential liability to third parties for the unauthorized duplication, distribution, or other use of this material. In addition, third parties have alleged, and in the future may allege, misappropriation, plagiarism, or similar claims related to content appearing on our platform. Any such claims, including claims of defamation, disparagement, negligence, warranty, misappropriation, or personal harm, could subject us to costly litigation and impose a significant strain on our financial resources and management personnel, regardless of whether the claims have merit. Our various liability insurance coverages may not cover potential claims of this type adequately or at all, and we may be required to alter or cease our uses of such material, which may include removing course content or altering the functionality of our platform, or be required to pay monetary damages.

While we rely on a variety of statutory and common law frameworks and defenses, including those provided by the Digital Millennium Copyright Act of 1998, or the DMCA, the Communications Decency Act, or the CDA, the fair-use doctrine in the United States and the E-Commerce Directive in the European Union, or the E.U., differences between statutes, limitations on immunity, requirements to maintain immunity, and moderation efforts in the many jurisdictions in which we operate may affect our ability to rely on these frameworks and defenses, or create uncertainty regarding liability for content posted to our platform. As an example, Article 17 of the Directive on Copyright in the Digital Single Market was passed in the E.U., which affords copyright owners some enforcement rights that may conflict with U.S. safe harbor protections afforded to us under the DMCA. Member states in the E.U. are in the process of determining how Article 17 will be implemented in their particular country. In addition, the E.U. is also reportedly reviewing the regulation of digital services, and it has been reported that the E.U. plans to introduce the Digital Services Act, a package of legislation intended to update the liability and safety rules for digital platforms, products, and services, which could negatively impact the scope of the limited immunity provided to us by the E-Commerce Directive. In countries in Asia and Latin America, generally there are not similar statutes to the CDA or E-Commerce Directive. The laws of countries in Asia and Latin America generally provide for direct liability if a platform is involved in creating such content or has actual knowledge of the content without taking action to take it down. Further, laws in some Asian countries also provide for primary or secondary liability, which can include criminal liability, if a platform failed to take sufficient steps to prevent such content from being uploaded. Although these and other similar legal provisions provide limited protections from liability for platforms like ours, if we are found not to be protected by the safe harbor provisions of the DMCA, CDA, or other similar laws, or if we are deemed subject to laws in other countries that may not have the same protections or that may impose more onerous obligations on us, including Article 17, we may owe substantial damages and our brand, reputation, and financial results may be harmed. Moreover, regulators in the United States and in other countries in which we operate may introduce new regulatory regimes that increase potential liability for information or content available on or through our platform, or which impose additional obligations to monitor such information or content, which could increase our costs.

Failure of our resellers or other commercial partners to use acceptable ethical business practices or comply with applicable laws could negatively impact our business.

In certain jurisdictions, such as Japan, we rely on third-party resellers and other commercial partners to distribute and market our offerings. We expect these resellers and partners to operate in compliance with applicable laws, rules, and regulations, but we cannot control their conduct. If any of our resellers or partners violates applicable laws or implements business practices that are regarded as unethical, the distribution of our platform in those jurisdictions could be interrupted, usage of our platform could decline, our reputation could be damaged and we may be subject to liability. Any of these events could have a negative impact on our business, financial condition, and results of operations.

Our revenue, results of operations, and financial condition could be negatively affected by general economic conditions.

Our business is sensitive to trends in the general economy, which is unpredictable. Therefore, our operating results, to the extent they reflect changes in the broader economy, may be subject to significant fluctuations.

 

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Since online learning is generally dependent on discretionary spending, negative general economic conditions could significantly reduce the overall amount that learners and organizations spend on, and the frequency of, online learning. Any or all of these factors could reduce the demand for our services, reducing our revenues. In addition, the occurrence of any of these events could increase our need to make significant expenditures to continue to attract learners and UB customers to our platform.

Our business and operations could be materially and adversely affected by natural disasters, public health crises, political crises, or other catastrophic events.

Our business and operations could be materially and adversely affected in the event of earthquakes, floods, fires, telecommunications failures, blackouts, or other power losses, break-ins, acts of terrorism, political crises, inclement weather, public health crises, pandemics or endemics, or other catastrophic events. In particular, our corporate headquarters are located in San Francisco, California, an earthquake-sensitive area and one that has been increasingly vulnerable to wildfires, and damage to or total destruction of our executive offices resulting from earthquakes may not be covered in whole or in part by any insurance we may have. If floods, fire, inclement weather including extreme rain, wind, heat, or cold, or accidents due to human error were to occur and cause damage to our properties, or if our operations were interrupted by telecommunications failures, blackouts, acts of terrorism, political or geopolitical crises, or public health crises, our results of operations would suffer, especially if such events were to occur during peak periods. We may not be able to effectively shift our operations due to disruptions arising from the occurrence of such events, and our business could be affected adversely as a result.

Our business could be harmed if we fail to manage our growth effectively.

The rapid growth we have experienced, and may continue to experience, in our business places significant demands on our operational infrastructure. The scalability and flexibility of our platform depends on the functionality of our technology and network infrastructure and our ability to handle increased traffic and demand for bandwidth. The growth in the number of learners and instructors using our platform and the amount of educational content available through our platform has increased the amount of data and requests that we process. Any problems with the transmission of increased data and requests could result in harm to our brand or reputation. Moreover, as our business grows, we will need to devote additional resources to improving our operational infrastructure and continuing to enhance our scalability in order to maintain the performance of our platform. Our growth has placed, and will likely continue to place, a significant strain on our managerial, administrative, operational, financial, and other resources. We have grown from 230 full-time employees in May 2016 to 888 full-time employees in December 2020. We intend to further expand our overall business, including headcount, with no assurance that our revenues will continue to grow. As we grow, we will be required to continue to improve our operational and financial controls and reporting procedures and we may not be able to do so effectively. As such, we may be unable to manage our expenses effectively in the future, which may negatively impact our gross profit or operating expenses.

Our future success depends on our ability to retain our senior management team and other highly skilled employees and to attract, retain, and motivate our qualified personnel.

We depend on the continued services and performance of our senior management team, key technical employees, and other key personnel. Although we have entered into employment agreements with senior management team members, each of them may terminate their employment with us at any time or not be able to perform the services we require in the future. We do not maintain “key person” insurance for any of our executives or other employees. Similarly, third parties may attempt to encourage our senior management team or other key employees to leave for other employment. The loss of one or more of the members of our senior management team or other key personnel for any reason could disrupt our operations, create uncertainty among investors, adversely impact employee retention and morale and significantly harm our business.

To execute our growth plan, we must hire many employees over the next few years. In addition, we must retain our highly qualified employees. Competition for highly qualified employees is intense, particularly from other high

 

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growth technology companies and in the San Francisco, California labor market, where our corporate headquarters are located.

From time to time we have experienced, and may continue to experience, difficulty in hiring and retaining employees with the appropriate level of qualifications. The companies with which we compete for qualified employees may have greater resources than we have and may offer compensation packages that are perceived to be better than ours. Additionally, changes in our compensation structure may be negatively received by employees and result in attrition or cause difficulty in the recruiting process. If we fail to attract new employees or fail to retain and motivate our current employees, our business and future growth prospects could be adversely affected.

Any failure to successfully execute and integrate future acquisitions could materially adversely affect our business, financial condition, and results of operations.

We may in the future pursue acquisitions of businesses, technologies, services and other assets and strategic investments that complement our business. We have limited experience as an organization with successfully executing and integrating acquisitions. Acquisitions involve numerous risks, including the following:

 

   

difficulties in integrating and managing the combined operations, technology platforms, or offerings of any company we acquire and realizing the anticipated economic, operational and other benefits of the acquisition in a timely manner, which could result in substantial costs and delays, and failure to execute on the intended strategy and synergies;

 

   

failure of the acquired businesses to achieve anticipated revenue, earnings, or cash flow;

 

   

diversion of management’s attention or other resources from our existing business;

 

   

our inability to maintain the key customers, business relationships, suppliers, and brand potential of acquired businesses;

 

   

uncertainty of entry into businesses or geographies in which we have limited or no prior experience or in which competitors have stronger positions;

 

   

unanticipated costs associated with pursuing acquisitions or greater than expected costs in integrating the acquired businesses;

 

   

responsibility for the liabilities of acquired businesses, including those that were not disclosed to us or exceed our estimates, such as liabilities arising out of the failure to maintain effective privacy, data protection and cybersecurity controls, and liabilities arising out of the failure to comply with applicable laws and regulations, including tax laws;

 

   

difficulties in or costs associated with assigning or transferring to us or our subsidiaries the acquired companies’ intellectual property or its licenses to third-party intellectual property;

 

   

inability to maintain our culture and values, ethical standards, controls, procedures, and policies;

 

   

challenges in integrating the workforce of acquired companies and the potential loss of key employees of the acquired companies;

 

   

challenges in integrating and auditing the financial statements of acquired companies that have not historically prepared financial statements in accordance with generally accepted accounting principles in the United States, or GAAP; and

 

   

potential accounting charges to the extent goodwill and intangible assets recorded in connection with an acquisition, such as trademarks, customer relationships, or intellectual property, are later determined to be impaired and written down in value.

We may not succeed in addressing these or other risks in connection with acquisitions. The inability to integrate successfully, or in a timely fashion, the business, technologies, products, personnel, or operations of any acquired business, could have a material adverse effect on our business, financial condition, and results of operations.

 

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We may need to raise additional funds to pursue our growth strategy or continue operations, and we may be unable to raise capital when needed or on acceptable terms.

From time to time, we may seek additional equity or debt financing to fund our growth, enhance our platform, respond to competitive pressures, or make acquisitions or other investments. Our business plans may change, general economic, financial or political conditions in our markets may deteriorate or other circumstances may arise, in each case that have a material adverse effect on our cash flows and the anticipated cash needs of our business. Any of these events or circumstances could result in significant additional funding needs, requiring us to raise additional capital. We cannot predict the timing or amount of any such capital requirements at this time. If financing is not available on satisfactory terms, or at all, we may be unable to expand its business at the rate desired and our results of operations may suffer.

We operate internationally and we plan to continue expanding our international operations, which exposes us to risks inherent in international operations.

Managing a global organization requires significant resources and management attention. We currently maintain offices outside of the United States in Turkey and Ireland, and we plan to expand our international operations in the future.

We generated 59% and 61% of our revenue outside North America in 2019 and 2020, respectively, and, based on our instructor registration records, we estimate that a majority of our instructors are located outside the United States. Any further international expansion efforts that we may undertake may not be as successful as we expect or at all.

Additionally, conducting international operations subjects us to risks that we have not generally faced in the United States. These risks include:

 

   

the cost and resources required to localize our services, which requires the translation of our websites into foreign languages and adaptation for local practices and regulatory requirements;

 

   

competition with local market participants who understand the local market better than we do or who have pre-existing relationships with our potential learners and UB customers in those markets;

 

   

legal uncertainty regarding our liability for the content and services provided by our instructors, including as a result of local laws or a lack of clear precedent of applicable law;

 

   

the burdens of complying with a wide variety of foreign laws and legal standards;

 

   

lack of familiarity with and unexpected changes in foreign regulatory requirements;

 

   

adapting to variations in payment forms from learners and UB customers;

 

   

difficulties in managing and staffing international operations;

 

   

fluctuations in currency exchange rates;

 

   

potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings;

 

   

increased financial accounting and reporting burdens and complexities and difficulties in implementing and maintaining adequate internal controls;

 

   

political, social, and economic instability abroad, terrorist attacks, and security concerns in general;

 

   

reduced or varied protection for intellectual property rights in some countries; and

 

   

higher telecommunications and internet service provider costs.

 

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Operating in international markets also requires significant management attention and financial resources. The investment and additional resources required to establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.

Our strategic and other relationships with partners overseas may also subject us to additional regulatory scrutiny in the United States and other jurisdictions. For example, the Committee on Foreign Investment in the U.S. has continued to apply a more stringent review of certain foreign investment in U.S. companies, and has made inquiries to us with respect to equity investments in us by foreign investors.

Further, as we continue to expand internationally, we could also become subject to increased difficulties in collecting accounts receivable, repatriating money without adverse tax consequences, and risks relating to foreign currency exchange rate fluctuations. We have not engaged in currency hedging activities to limit risk of exchange rate fluctuations, and while we may decide to do so in the future, the availability and effectiveness of these hedging transactions may be limited. Changes in exchange rates affect our costs and earnings, and may also affect the book value of our assets located outside the United States and the amount of our stockholders’ equity.

We are subject to laws and regulations worldwide, and failure to comply with such laws and regulations could subject us to claims or otherwise adversely affect our business, financial condition and results of operations.

We are subject to a variety of laws in the U.S. and abroad that affect our business. As a global platform with learners and instructors in over 180 countries, we are subject to a wide range of laws and regulations regarding consumer protection, advertising, electronic marketing, privacy, data protection and cybersecurity, data localization requirements, online services, freedom of speech, labor, real estate, taxation, intellectual property ownership and infringement, tax, export and national security, tariffs, anti-corruption and telecommunications, all of which are continuously evolving and developing.

The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly laws outside the U.S., and compliance with laws, regulations and similar requirements may be burdensome and expensive. Because these laws and regulations are subject to change over time, we must continue to dedicate resources to monitoring developments in the law and ensuring compliance. Laws and regulations may be inconsistent from jurisdiction to jurisdiction, and certain jurisdictions may impose more stringent regulatory requirements than the U.S., which may increase the cost of compliance and doing business and expose us to possible litigation, penalties, or fines. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation, could make our platform less attractive to learners, instructors, or enterprise customers or cause us to change or limit our ability to make available our platform. We have policies and procedures designed to ensure compliance with applicable laws and regulations, but we cannot assure you that we will not experience violations of such laws and regulations or our policies and procedures. Any such violations could subject us to investigations, sanctions, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operating results, and financial condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, operating results, and financial condition.

We are subject to governmental export and import controls and regulations that could impair our ability to compete in international markets and subject us to liability if we are not in full compliance with applicable laws.

Our business activities are subject to various restrictions under U.S. export and similar laws and regulations, including trade and economic sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control and, in some cases, the U.S. Department of Commerce’s Export Administration

 

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Regulations. The U.S. export control and economic sanctions laws and regulations include restrictions or prohibitions on the sale of certain services to U.S. embargoed or sanctioned countries, governments, persons, and entities which in some cases might apply to our activities. In addition, various countries regulate the import of certain technology and have enacted or could enact laws that could limit our ability to provide learners access to our platform or could limit our learners’ ability to access or use our services in those countries.

Although we take precautions to prevent our platform from being provided in violation of such laws, our platform could be provided inadvertently in violation of such laws, despite the precautions we take. Complying with these laws and regulations could be particularly difficult because our products are widely available worldwide, in some cases, by providing only minimal information at registration. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to civil or criminal penalties, including the possible loss of export privileges and fines. We also may be adversely affected through penalties, reputational harm, loss of access to certain markets, or otherwise. In addition, various countries regulate the import and export of certain encryption and other technology, including import and export permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our platform or could limit our learners’ ability to access our platform in those countries. Changes in our platform, or future changes in export and import regulations, may prevent our international learners or instructors from using our platform or, in some cases, prevent the export or import of our platform to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions, or related legislation or changes in the countries, governments, persons, or technologies targeted by such regulations, could result in decreased use of our platform.

Failure to comply with anti-bribery, anti-corruption, and anti-money laundering laws, and similar laws, could subject us to penalties and other adverse consequences.

We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, and possibly other anti-bribery laws and anti-money laundering laws in countries outside of the United States in which we conduct our activities. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees, agents, representatives, business partners, and third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector.

We sometimes engage third parties to sell our products and conduct our business abroad. We and our employees, agents, representatives, business partners, or third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for the corrupt or other illegal activities of these employees, agents, representatives, business partners, or third-party intermediaries even if we do not explicitly authorize such activities. We cannot assure you that none of our employees and agents will take actions in violation of applicable law, for which we may be ultimately held responsible. As we increase our international sales and business, our risks under these laws may increase.

These laws also require that we keep accurate books and records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have policies and procedures to address compliance with such laws, we cannot assure you that none of our employees, agents, representatives, business partners, or third-party intermediaries will take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.

Any allegations or violation of the FCPA or other applicable anti-bribery and anti-corruption laws and anti-money laundering laws could result in whistleblower complaints, sanctions, settlements, prosecution, enforcement actions, fines, damages, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, or suspension or debarment from U.S. government contracts, all of which may have an adverse effect on our reputation, business, financial condition, results of operations, and prospects. Responding to any investigation or action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees.

 

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We are from time to time involved in claims, lawsuits, government investigations, and other proceedings that could adversely affect our business, financial condition, and results of operations.

We are involved in litigation matters from time to time, such as matters incidental to the ordinary course of our business, including intellectual property, commercial, employment, class action, whistleblower, accessibility, and other litigation and claims, and governmental and other regulatory investigations and proceedings. Such matters can be time-consuming, divert management’s attention and resources, cause us to incur significant expenses or liability, or require us to change our business practices. In addition, the expense of litigation and the timing of these expenses from period to period are difficult to estimate, subject to change, and could adversely affect our financial condition and results of operations. Because of the potential risks, expenses, and uncertainties of litigation, we may, from time to time, settle disputes, even where we have meritorious claims or defenses, by agreeing to settlement agreements. Any of the foregoing could adversely affect our business, financial condition, and results of operations.

Increased scrutiny and changing expectations from investors, customers, employees, and others regarding our environmental, social and governance practices and reporting could cause us to incur additional costs, devote additional resources and expose us to additional risks, which could adversely impact our reputation, customer acquisition and retention, access to capital and employee retention.

Companies across all industries are facing increasing scrutiny related to their environmental, social and governance, or ESG, practices and reporting. Investors, customers, employees and other stakeholders have focused increasingly on ESG practices and placed increasing importance on the implications and social cost of their investments, purchases and other interactions with companies. For example, many investment funds focus on positive ESG business practices and sustainability scores when making investments and may consider a company’s ESG or sustainability scores as a reputational or other factor in making an investment decision. In addition, investors, particularly institutional investors, use these scores to benchmark companies against their peers and if a company is perceived as lagging, these investors may engage with such company to improve ESG disclosure or performance and may also make voting decisions on this basis. With this increased focus and demand, public reporting regarding ESG practices is becoming more broadly expected. If our ESG practices and reporting do not meet investor, customer, or employee expectations, which continue to evolve, our brand, reputation, and learner and UB customer retention may be negatively impacted. Any disclosure we make may include our policies and practices on a variety of ESG matters, including corporate governance, environmental compliance, employee health and safety practices, human capital management, and workforce inclusion and diversity. It is possible that stakeholders may not be satisfied with our ESG reporting, our ESG practices or our speed of adoption. We could also incur additional costs and devote additional resources to monitor, report and implement various ESG practices. If we fail, or are perceived to be failing, to meet the standards included in any sustainability disclosure or the expectations of our various stakeholders, it could negatively impact our reputation, UB customer and learner acquisition and retention, access to capital and employee retention.

Risks related to technology, privacy, and cybersecurity

Changes in laws or regulations relating to privacy, data protection, or cybersecurity, including those relating to the protection or transfer of data relating to individuals, or any actual or perceived failure by us to comply with such laws and regulations or any other obligations could adversely affect our business.

We receive, transmit, and store personally identifiable information and other data relating to our learners, instructors, and other individuals, such as our employees. Numerous local, municipal, state, federal, and international laws and regulations address privacy, data protection, cybersecurity, and the collection, storing, sharing, use, disclosure, and protection of certain types of data, including the California Online Privacy Protection Act, the Personal Information Protection and Electronic Documents Act, the Controlling the Assault of Non-Solicited Pornography and Marketing Act, Canada’s Anti-Spam Legislation, the E.U. General Data Protection

 

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Regulation, or GDPR, the Telephone Consumer Protection Act (restricting telemarketing and the use of automated SMS text messaging), Section 5 of the Federal Trade Commission Act, and the California Consumer Privacy Act, or the CCPA. These laws, rules, and regulations evolve frequently and their scope may continually change, through new legislation, amendments to existing legislation, and changes in enforcement, and may be inconsistent from one jurisdiction to another.

For example, the GDPR, which became effective on May 25, 2018, has resulted and will continue to result in significantly greater compliance burdens and costs for companies like ours. The GDPR regulates our collection, control, processing, sharing, disclosure, and other use of data that can directly or indirectly identify a living individual that is a resident of the E.U. and imposes stringent data protection requirements with significant penalties and the risk of civil litigation, for noncompliance. Failure to comply with the GDPR may result in fines of up to 20 million euros or up to 4% of the annual global revenue of the infringer, whichever is greater. It may also lead to civil litigation, with the risks of damages, injunctive relief, or regulatory orders adversely impacting the ways in which our business can use personal data.

In addition, in January 2021, the United Kingdom transposed the GDPR into domestic law with a United Kingdom version of the GDPR (combining the GDPR and the United Kingdom Data Protection Act of 2018), referred to as the U.K. GDPR, which provides for fines of up 17.5 million British pounds sterling or 4% of global turnover, whichever is greater. The relationship between the United Kingdom and the E.U. in relation to certain aspects of data protection law remains unclear. An example is the regulation of data transfers between E.U. member states and the United Kingdom and the role of the United Kingdom’s Information Commissioner’s Office with respect to the E.U. These changes will lead to additional costs and increase our overall risk exposure.

Additionally, we are or may become subject to laws, rules, and regulations regarding cross-border transfers of personal data, including those relating to transfer of personal data outside the European Economic Area, or the EEA. Recent legal developments have created complexity and uncertainty regarding transfers of personal data from the EEA to the U.S. and other jurisdictions. For example, on July 16, 2020, the Court of Justice of the European Union, or CJEU, invalidated the E.U.-U.S. Privacy Shield Framework, or the Privacy Shield, under which personal data could be transferred from the EEA to U.S. entities that had self-certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism and potential alternative to the Privacy Shield), it noted that reliance on them may not necessarily be sufficient in all circumstances. In addition to other mechanisms (particularly standard contractual clauses), in limited circumstances we may rely on Privacy Shield certifications of third parties (for example, vendors and partners). These developments regarding cross-border data transfers have created uncertainty and increased the risk around our international operations and may require us to review and amend the legal mechanisms by which we make or receive personal data transfers to the U.S. and other jurisdictions.

The CCPA, which went into effect on January 1, 2020, among other things, requires covered companies to provide new disclosures to California consumers and affords such consumers the ability to opt out of certain types of data sharing and sales of their personal information. The CCPA also prohibits covered businesses from discriminating against consumers (for example, charging more for services) for exercising their rights. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. Additionally, in November 2020, California voters passed the California Privacy Rights and Enforcement Act of 2020, or the CPRA. The CPRA further expands the CCPA with additional data privacy compliance requirements that may impact our business and establishes a regulatory agency dedicated to enforcing those requirements. Aspects of the interpretation and enforcement of the CCPA and CPRA remain uncertain. The enactment of the CCPA has prompted a wave of similar legislative developments in other states in the U.S., which creates the potential for a patchwork of overlapping but different state laws and could mark the beginning of a trend toward more stringent privacy legislation in the U.S., which could increase our potential liability and adversely affect our business, financial condition, and results of operations. For example, in March 2021, Virginia enacted the Virginia Consumer Data Protection Act, or CDPA, a comprehensive privacy statute that

 

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becomes effective on January 1, 2023 (at the same time as the CPRA) and shares similarities with the CCPA, the CPRA, and legislation proposed in other states, and in June 2021, Colorado enacted a similar law, the Colorado Privacy Act, or CPA, that becomes effective on July 1, 2023. The effects of these state statutes and other similar state or federal laws are significant and may require us to modify our data processing practices and policies and incur substantial compliance-related costs and expenses. Additionally, many laws and regulations relating to privacy and the collection, storing, sharing, use, disclosure, and protection of certain types of data are subject to varying degrees of enforcement and new and changing interpretations by courts. These laws and other changes in laws or regulations relating to privacy, data protection, and cybersecurity, particularly any new or modified laws or regulations, or changes to the interpretation or enforcement of such laws or regulations, that require enhanced protection of certain types of data or new obligations with regard to data retention, transfer, or disclosure, could greatly increase the cost of providing our platform, require significant changes to our operations, or even prevent us from providing our platform in jurisdictions in which we currently operate and in which we may operate in the future.

Additionally, we have incurred, and may continue to incur, significant expenses in an effort to comply with privacy, data protection, and cybersecurity standards and protocols imposed by law, regulation, industry standards, or contractual obligations. Publication of our privacy statement and other policies regarding privacy, data protection, and cybersecurity may subject us to investigation or enforcement actions by regulators if those statements or policies are found to be deficient, lacking transparency, deceptive, unfair, or misrepresentative of our practices. We are also bound by contractual obligations related to privacy, data protection, and cybersecurity and our efforts to comply with such obligations may not be successful or may have other negative consequences. The various privacy, data protection, and cybersecurity legal obligations that apply to us may evolve in a manner that relates to our practices or the features of our mobile apps or website and we may need to take additional measures to comply with the new and evolving legal obligations, including but not limited to training efforts for our employees, contractors and third party partners. Such efforts may not be successful or may have other negative consequences. In particular, with laws and regulations such as the CCPA, CPRA, CDPA, and CPA imposing new and relatively burdensome obligations and with substantial uncertainty over the interpretation and application of these and other laws and regulations, we may face challenges in addressing their requirements and making necessary changes to our policies and practices and may incur significant costs and expenses in an effort to do so. Despite our efforts to comply with applicable laws, regulations, and other obligations relating to privacy, data protection and cybersecurity, it is possible that our interpretations of the law, practices, policies, or platform or other services or offerings could be inconsistent with, or fail or be alleged to fail to meet all requirements of, such laws, regulations, or obligations. Any failure, or consequences associated with our efforts to comply with applicable laws or regulations or any other obligations relating to privacy, data protection, or cybersecurity, or any compromise of security that results in unauthorized access to, or use or release of data relating to learners, instructors, or other individuals, or the perception that any of the foregoing types of failure or compromise has occurred, could damage our reputation, discourage new and existing learners, instructors, and UB customers from using our platform, or result in fines, investigations, or proceedings by governmental agencies and private claims and litigation, any of which could adversely affect our business, financial condition and operating results. Even if not subject to legal challenge, the perception of concerns relating to privacy, data protection, or cybersecurity, whether or not valid, may harm our reputation and brand adversely affect our business, financial condition, and operating results.

A cybersecurity attack or other security breach or incident could delay or interrupt service to our learners, instructors, and UB customers, harm our reputation or subject us to significant liability.

Our platform involves the processing of significant amounts of data relating to the learners, instructors, and UB customers interacting with our platform, including personal data and personal information. Additionally, we collect and store certain sensitive and proprietary information, and personal data and personal information, in the operation of our business, including trade secrets, intellectual property, employee data, and other confidential data.

 

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We engage third-party service providers to store and otherwise process certain data, including sensitive and personal information. Our service providers have been, and in the future may be, the targets of cyberattacks, malicious software, phishing schemes, fraud, and other risks to the confidentiality, security, and integrity of their systems and the data they process for us. Our ability to monitor our service providers’ cybersecurity is limited, and, in any event, third parties may be able to circumvent those security measures, resulting in the unauthorized access to, misuse, disclosure, loss, or destruction of data they process for us, including sensitive and personal information. There have been and may continue to be significant supply chain attacks, and we cannot guarantee that our or our third-party providers’ systems and networks have not been breached or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our systems and networks or the systems and networks of third parties that support us and our services.

While we have taken measures to protect our own proprietary and confidential information, as well as the personal information, personal data, and confidential information that we otherwise obtain, and measures to protect our platform, we, the networks and systems used in our business, including those of third-party service providers, we and our third-party service providers have experienced, and we, our service providers and our platform may in the future experience, cybersecurity attacks or other security breaches. Cybersecurity attacks may take the form of denial of service attacks, ransomware attacks or other attacks, and can come from individual hackers, criminal groups, and state-sponsored organizations. These sources can also implement social engineering techniques to induce our employees, contractors, or customers to disclose passwords or other sensitive information or take other actions to gain access to data, and we and our platform otherwise may be subject to security breaches and incidents resulting from employee or contractor error or malfeasance. We may be more susceptible to cyberattacks and other security breaches and other security incidents while social distancing measures restricting the ability of our employees to work at our offices are in place to combat the COVID-19 pandemic because we have less capability to implement, monitor, and enforce our information security and data protection policies.

More generally, we cannot guarantee that applicable recovery systems, security protocols, network protection mechanisms, and other procedures of ourselves of our third-party service providers are or will be adequate to prevent network and service interruption, system failure or loss, corruption, or unauthorized access to, or disclosure or acquisition of, data, including personal data, personal information, and other sensitive information that we or they process or maintain. Moreover, our platform could be breached or disrupted if vulnerabilities in our platform are exploited by unauthorized third parties. Since techniques used to obtain unauthorized access change frequently and the size of cybersecurity attacks and of security breaches and incidents are increasing, we and our third-party service providers may be unable to implement adequate preventative measures or stop the attacks while they are occurring. A cybersecurity attack or security breach or incident could delay or interrupt service to our learners, instructors, or organizations and may deter learners, instructors, or organizations from using our platform, and we and our service providers may face difficulties or delays in identifying, remediating, and otherwise responding to any cybersecurity attack or other security breach or incident. In addition, any actual or perceived cybersecurity attack or security breach or incident could damage our reputation and brand, expose us to a risk of claims, litigation, regulatory investigations, or other proceedings and possible fines, penalties, or other liability and require us to expend significant capital and other resources to alleviate problems caused by the cybersecurity attack or security breach. We incur significant costs in an effort to detect and prevent security breaches and other security-related incidents, and we expect our costs will increase as we make improvements to our systems and processes to prevent future breaches and incidents. Some jurisdictions have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data. Such mandatory disclosures could lead to negative publicity and any such disclosures, or any belief that a cybersecurity attack, or a security breach or incident, has impacted us, our platform, or our service providers may cause our learners, instructors, or UB customers to lose confidence in the security of our platform and the effectiveness of the cybersecurity measures we and our service providers utilize.

Further, any limitations of liability provisions in our customer and user agreements, contracts with third-party service providers, or other contracts may not be enforceable or adequate or otherwise protect us from any

 

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liabilities or damages with respect to any particular claim relating to a security breach or other security-related matter. While our insurance policies include liability coverage for certain of these matters, subject to applicable deductibles, if we experienced a cybersecurity attack or other security breach or other incident, we could be subject to claims or damages that exceed our insurance coverage. If such an attack or other breach or incident occurred, our insurance coverage might not be adequate for liabilities actually incurred, such insurance may not continue to be available to us in the future on economically reasonable terms, or at all, and insurers may deny us coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.

Interruptions or performance problems associated with our technology and infrastructure could adversely affect our business and results of operations.

Our continued growth partially depends on the ability of learners and instructors to access our platform at any time. Our platform has encountered, and may in the future encounter, disruptions, outages, and other performance problems due to a variety of factors, including infrastructure changes, introductions of new capabilities, human or technology errors, distributed denial of service attacks, or other security related incidents. In some instances, we may not be able to identify the cause or causes of these performance problems in a timely manner. It may become increasingly difficult to maintain and improve the performance of our platform as it grows and becomes more complex, and in the future we may be required to allocate significant resources to augment and update our technology and network infrastructure. If learners or instructors are unable to access our platform within a reasonable amount of time, or at all, our business will be harmed.

Our business depends significantly on continued access to the internet and mobile networks.

Our learners and instructors rely on access to the internet and mobile networks to access our platform. Internet service providers may choose to disrupt or degrade our access to our platform or increase the cost of such access. Internet service providers or mobile network operators could also attempt to charge us for providing access to our platform. In 2015, rules approved by the Federal Communications Commission, or FCC, went into effect that prohibited internet service providers from charging content providers higher rates in order to deliver their content over certain “fast traffic” lanes; however, those rules were repealed in June 2018, and efforts to challenge the repeal in the courts have failed to reverse the FCC’s 2018 decision, and in October 2019, the U.S. Court of Appeals for the District of Columbia Circuit issued a mixed ruling that did not reverse the FCC’s 2015 decision in its entirety. Although this recent court ruling allows states to enact their own net neutrality rules, the repeal of federal protections may make it more difficult or costly for many buyers or instructors to access our platform and may result in increased costs for us, which could significantly harm our business. Outside the United States, government regulation of the internet, including the idea of network neutrality, may be developing or non-existent. It is possible that governments of one or more foreign countries may seek to censor content available on our platform or may even attempt to block access to our platform. If we are restricted from operating in one or more countries, our ability to attract and retain learners, instructors, and customers may be adversely affected and we may not be able to grow our business as we anticipate.

We rely on Amazon Web Services for a substantial portion of our platform services. Any disruption of, or interference with, our use of Amazon Web Services could negatively impact our business and operations.

Amazon Web Services provides distributed computing infrastructure platforms for business operations, commonly referred to as “cloud” computing services. We currently run a significant portion of our platform’s computing on Amazon Web Services, and any significant disruption of, or interference with, our use of Amazon Web Services would negatively impact our operations and our business would be seriously harmed. If learners or instructors are unable to access our platform through Amazon Web Services or encounter difficulties in doing so, we may lose learners, instructors, and UB customers. The level of service provided by Amazon Web Services may also impact

 

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the adoption and perception of our platform. If Amazon Web Services experiences interruptions in service regularly or for a prolonged basis, or other similar issues, our business would be seriously harmed. Hosting costs will also increase if and as our base of learners, instructors, and UB customers grows, and our business, financial condition, and results of operations may be adversely affected if we are unable to grow our revenues faster than the cost of using Amazon Web Services or similar providers increases.

Amazon Web Services may take actions beyond our control that could seriously harm our business, including discontinuing or limiting access to Amazon Web Services, increasing pricing terms, terminating our contract, establishing more favorable relationships or pricing terms with one or more of our competitors, and modifying or interpreting its terms of service or other policies in a manner that impacts our ability to administer our business and operations.

Our payments system depends on third-party providers and is subject to evolving laws and regulations.

We rely on third-party payment processors to process payments made by learners and customers, and to instructors, on our platform. We have engaged third-party service providers to perform underlying card processing, currency exchange, identity verification, and fraud analysis services. If these service providers do not perform adequately or if they terminate their relationships with us or refuse to renew their agreements with us on commercially reasonable terms, we will need to find an alternate payment processor and may not be able to secure similar terms or replace such payment processors in an acceptable time frame. Further, the software and services provided by our third-party payment processors may not meet our expectations, contain errors or vulnerabilities, be compromised, or experience outages. Any of these risks could cause us to lose our ability to accept online payments, make payments to our instructors or conduct other payment transactions, any of which could make our platform less convenient and attractive and harm our ability to attract and retain learners, instructors, and customers. In addition, if these providers increase the fees they charge us, our operating expenses could increase.

The laws and regulations related to payments are complex and vary across different jurisdictions in the United States and globally. As a result, we are required to spend significant time and effort to comply with those laws and regulations. Any failure or claim of our failure to comply, or any failure by our third-party service providers to comply, could cost us substantial resources, result in liabilities, or force us to stop offering certain third-party payment services. In addition, as we expand our international operations, we will need to accommodate international payment method alternatives. As we expand the availability of new payment methods in the future, including internationally, we may become subject to additional regulations and compliance requirements.

Further, through our agreement with our third-party credit card processors, we are indirectly subject to payment card association operating rules and certification requirements, including the Payment Card Industry Data Security Standard. We are also subject to rules governing electronic funds transfers. Any change in these rules and requirements could make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to additional fines and higher transaction fees and lose our ability to accept credit and debit card payments from our learners and UB customers, process electronic funds transfers or facilitate other types of online payments, and our business and operating results could be adversely affected.

The use of our platform could be adversely affected if our mobile solutions are not effective.

Learners have been increasingly accessing our platform on mobile devices through our Udemy and UB apps in recent years. The smaller screen size and reduced functionality associated with some mobile devices may make the use of our platform more difficult. Those accessing our platform primarily on mobile devices may not enroll in the courses offered on our platform as often as those accessing our platform through personal computers, which could result in less revenue for us. If we are not able to provide a rewarding experience on mobile devices, our ability to attract learners to our platform could be impaired, and consequently our business may suffer.

 

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As new mobile devices and mobile features are released, we may encounter problems in developing or supporting apps for them. In addition, supporting new devices and mobile device operating systems may require substantial time and resources.

The success of our mobile apps could also be harmed by factors outside our control, including:

 

   

actions taken by mobile app distributors, including the Apple App Store and the Google Play Store;

 

   

unfavorable treatment received by our mobile apps, especially as compared to competing apps, such as the placement of our mobile apps in a mobile app download store;

 

   

increased costs in the distribution and use our mobile app; or

 

   

changes in mobile operating systems, such as iOS and Android, that degrade the functionality of our mobile website or mobile apps or that give preferential treatment to competitive offerings.

If our learners encounter difficulty accessing or using, or if they choose not to use, our mobile platform, our business and results of operations may be adversely affected.

Internet search engines drive traffic to our platform and, if we fail to appear prominently in search results, our growth rate could decline and our business, financial condition and results of operations could be adversely affected.

Many learners find our website through internet search engines, like Google. A critical factor in attracting learners to our website is how prominently we are displayed in response to search queries. Search engine companies typically provide two types of search results: algorithmic listings and paid advertisements. We rely on both types of search results to attract visitors to our website. Algorithmic search result listings are determined and displayed in accordance with a set of proprietary formulas or algorithms developed by particular search engine companies. From time to time, these companies revise their algorithms without notice. In some instances, these modifications have caused our website to be listed less prominently in search results. In addition, search engine companies retain broad discretion to remove from search results any company whose marketing practices are deemed to be inconsistent with the search engine companies’ guidelines. If our marketing practices violate or appear to violate search engine company guidelines, we may, without warning, not appear in search result listings at all. If we are listed less prominently or fail to appear in search result listings for any reason, visits by prospective learners to our website would likely decline. We may not be able to replace this traffic and any attempt to do so may require us to increase our sales and marketing expenditures, which may not be offset by additional revenue and could adversely affect our operating results.

Risks related to our intellectual property

We may be unable to adequately obtain, maintain, protect, and enforce our intellectual property and proprietary information, which could adversely affect our business, financial condition, and results of operations.

Our business depends on our intellectual property, the protection of which is critical to our success. We rely on a combination of intellectual property rights, including patents, trade secrets, trade dress, domain names, copyrights, and trademarks to protect our competitive advantage, all of which offer only limited protection. The steps we take to protect our intellectual property, including physical, operational, and managerial protections of our confidential information, contractual obligations of confidentiality, assignment agreements with our employees and contractors, license agreements, and the prosecution and maintenance of registrations and applications for registration of intellectual property rights, require significant resources and may be inadequate. We will not be able to protect our competitive advantage if we are unable to establish, protect, maintain, or enforce our rights or if we do not detect or are unable to address unauthorized use of our intellectual property. We may be required to

 

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use significant resources to monitor and protect these rights. Despite our precautions, it may be possible for unauthorized third parties to copy portions or all of our platform and use information that we regard as proprietary to create services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer, and disclosure of our proprietary information may be unenforceable under the laws of certain jurisdictions.

As of December 31, 2020, we held 12 registered trademarks in the United States and 23 registered trademarks in foreign jurisdictions. We also have common law rights in some trademarks and pending trademark applications in the United States and foreign jurisdictions. In addition, we have registered domain names for websites that we use in our business, such as www.udemy.com and some other variations. Competitors may adopt service names or domain names similar to ours, thereby harming our ability to build brand identity and possibly leading to user confusion. In addition, our registered or unregistered trademarks or trade names could be declared generic, and there could be potential trade name or trademark infringement claims brought by owners of other trademarks that are similar to our trademarks. If our trademarks and trade names are not adequately protected, then we may not be able to build and maintain name recognition in our markets of interest and our business may be adversely affected. Effective trademark protection may not be available or may not be sought in every country in which our products are made available, in every class of goods and services in which we operate, and contractual disputes may affect the use of marks governed by private contract. Further, we hold a small number of issued patents and thus have a limited ability to exclude or prevent our competitors from implementing technology, methods, and processes similar to our own. Litigation or proceedings before the U.S. Patent and Trademark Office or other governmental authorities and administrative bodies in the United States and abroad may be necessary in the future to enforce our intellectual property rights and to determine the validity and scope of our rights and the proprietary rights of others. Further, we may not timely or successfully apply for a patent or register its trademarks or otherwise secure rights in our intellectual property. We expect to continue to expand internationally and, in some foreign countries, the mechanisms to establish and enforce intellectual property rights may be inadequate to protect our technology, which could harm our business.

It is our policy to enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships. No assurance can be given that these agreements will be effective in controlling access to our proprietary information and trade secrets. The confidentiality agreements on which we rely to protect certain technologies may be breached, may not be adequate to protect our confidential information, trade secrets, and proprietary technologies, and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, trade secrets, or proprietary technology. Further, these agreements do not prevent our competitors or others from independently developing products that are substantially equivalent or superior to ours. In addition, others may independently discover our trade secrets and confidential information, and in such cases we may not be able to assert any trade secret rights against such parties. Additionally, we may from time to time be subject to opposition or similar proceedings with respect to applications for registrations of our intellectual property, including trademarks. While we aim to acquire adequate protection of our brand through trademark registrations in key markets, occasionally third parties may have already registered or otherwise acquired rights to identical or similar marks for services that also address our market. We rely on our brand and trademarks to identify our platform and to differentiate our platform and services from those of our competitors, and if we are unable to adequately protect our trademarks, third parties may use our brand names or trademarks similar to ours in a manner that may cause confusion in the market, which could decrease the value of our brand and adversely affect our business and competitive advantages.

Our intellectual property rights and the enforcement or defense of such rights may be affected by developments or uncertainty in laws and regulations relating to intellectual property rights. Moreover, many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, which could make it difficult for us to stop the

 

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infringement, misappropriation, or other violation of our intellectual property or marketing of competing products in violation of our intellectual property rights generally.

Policing unauthorized use of our intellectual property and misappropriation of our technology and trade secrets is difficult and we may not always be aware of such unauthorized use or misappropriation. Despite our efforts to protect our intellectual property rights, unauthorized third parties may attempt to use, copy, or otherwise obtain and market or distribute our technology or otherwise develop services with the same or similar functionality as our platform. If our competitors infringe, misappropriate, or otherwise violate our intellectual property rights and we are not adequately protected, or if our competitors are able to develop a platform with the same or similar functionality as ours without infringing our intellectual property, our competitive advantage and results of operations could be harmed. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming, and distracting to management and could result in the impairment or loss of portions of our intellectual property. As a result, we may be aware of infringement by our competitors but may choose not to bring litigation to protect our intellectual property rights due to the cost, time, and distraction of bringing such litigation. Furthermore, if we do decide to bring litigation, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits challenging or opposing our right to use and otherwise exploit particular intellectual property, services, and technology or the enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our solutions, impair the functionality of our platform, prevent or delay introductions of new or enhanced solutions, result in us substituting inferior or more costly technologies into our platform, or injure our reputation. Furthermore, many of our current and potential competitors may have the ability to dedicate substantially greater resources to developing and protecting their technology or intellectual property rights than we do.

Intellectual property litigation, including litigation related to content available on our platform, could result in significant costs and adversely affect our business, financial condition, results of operations, and reputation.

Companies in the technology industry are frequently subject to litigation based on allegations of infringement or other violations of intellectual property rights. We periodically receive notices that claim we have infringed, misappropriated, or misused other parties’ intellectual property rights, including with respect to the content. As we gain greater public recognition, we may face a higher risk of being the subject of intellectual property claims. Any intellectual property claims against us, with or without merit, could be time consuming and expensive to settle or litigate and could divert the attention of our management. Some of our competitors have extensive portfolios of issued patents. Many potential litigants, including some of our competitors and patent holding companies, have the ability to dedicate substantial resources to enforcing their intellectual property rights. Litigation regarding intellectual property rights is inherently uncertain due to the complex issues involved, and we may not be successful in defending ourselves in such matters. Furthermore, we may not qualify for the safe harbors established by laws in the United States and other countries protecting online service providers from claims related to content posted by users, or those laws could change in a manner making them difficult or impossible to qualify for such protection, increasing our exposure. For more information, see “—Risks related to our business and operations—We could face liability, or our reputation might be harmed, as a result of courses posted to our platform.”

Any claims successfully brought against us could subject us to significant liability for damages and we may be required to stop using technology or other intellectual property alleged to be in violation of a third party’s rights. We also might be required to seek a license for third-party intellectual property. Even if a license is available, we could be required to pay significant royalties or submit to unreasonable terms, which would increase our operating expenses. We may also be required to develop alternative non-infringing technology, which could require significant time and expense. If we cannot license or develop technology for any allegedly infringing aspect of our business, we would be forced to limit our service and may be unable to compete effectively. Any of these results could harm our business.

 

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

We use open source software in our platform and expect to continue to use open source software in the future. In addition, we contribute software source code to open source projects under open source licenses or release internal software projects under open source licenses and anticipate continuing to do so in the future. Additionally, under some open source licenses, if we combine our proprietary software with open source software in a certain manner, certain proprietary software (including our own software) or other intellectual property rights could become subject to obligations to be disclosed in source code form and licensed, including for the purpose of enabling further modification and distribution, and at no charge or for only a nominal fee. Third parties may also seek to enforce the terms of the applicable open source license through litigation which, if successful, could subject us to liability and require us to make our proprietary software source code available under an open source license, seek to purchase a license (which, if available, could be costly), and cease offering the implicated products or services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources, and we may not be able to complete it successfully. Many of the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide or distribute our products or services. While we try to insulate our proprietary code from the effects of such open source license provisions, we cannot guarantee that we will be successful, that all open source software is reviewed prior to use in our products, that our developers have not incorporated open source software into our products in potentially disruptive ways, or that they will not do so in the future. In addition to risks related to open source license requirements, use of certain open source software may pose greater risks than use of third-party commercial software, since open source licensors generally do not provide warranties or controls on the origin of software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could adversely affect our business, financial condition, and results of operations.

Risks related to financial reporting, taxation, and operations as a public company

We are an emerging growth company, and any decision to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including:

 

   

our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected;

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports and annual report on Form 10-K; and

 

   

exemptions from the requirements of holding non-binding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved.

As a result, our stockholders may not have access to certain information that they may deem important. We will remain an emerging growth company until the earliest of:

 

   

the last day of the fiscal year in which we have at least $1.07 billion in annual revenue;

 

   

the last day of the fiscal year in which we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates;

 

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the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or

 

   

the last day of the fiscal year ending after the fifth anniversary of the completion of this offering.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to take advantage of this extended transition period until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

So long as we qualify as an emerging growth company, we may elect not to provide you with certain information that we would otherwise have been required to provide in filings we make with the Securities and Exchange Commission, or the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be adversely affected. Further, we cannot predict if investors will find our common stock less attractive if we choose to rely on any of the exemptions afforded emerging growth companies. If some investors find our common stock less attractive because we rely on any of these exemptions, there may be a less active trading market for our common stock and the market price of our common stock may be more volatile and may decline.

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired, which may adversely affect investor confidence in us and, as a result, lead to a decline in the market price of our common stock.

As a public company, we will be required to comply with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of the                 . The Sarbanes-Oxley Act, among other things, requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers.

Under the Sarbanes-Oxley Act, we will be required to make a formal assessment of the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K, and, once we cease to be an emerging growth company and if we are deemed to be an accelerated filer or large accelerated filer for purposes of the Exchange Act, we will be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with these requirements within the prescribed time period, we will be engaging in a process to document and evaluate our internal control over financial reporting, which we anticipate will be costly, challenging, and time consuming. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants, and adopt a detailed work plan to assess and document the adequacy of our internal control over financial reporting, validate through testing that controls are functioning as documented, and implement a continuous reporting and improvement process for internal control over financial reporting. There is a risk that we will not be able to conclude, within the prescribed period or at all, that our internal control over financial reporting is effective as required by Section 404 of the Sarbanes-Oxley Act. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the                 . Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Moreover, our testing, or the subsequent testing by our independent registered public accounting firm, may reveal additional deficiencies in our internal control over financial reporting that are deemed to be material weaknesses.

 

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Any failure to implement and maintain effective disclosure controls and procedures and internal control over financial reporting, including the identification of one or more material weaknesses, could cause investors to lose confidence in the accuracy and completeness of our financial statements and reports, which would likely adversely affect the market price of our common stock. In addition, we could be subject to sanctions or investigations by                 , the SEC, and other regulatory authorities.

Following this offering, we will incur increased costs and administrative burdens as a public company, which could have an adverse effect on our business, financial condition and results of operations.

Following this offering, we will incur increased legal, accounting, administrative, and other costs and expenses as a public company that we do not incur as a private company, and these expenses may increase even more after we are no longer an “emerging growth company.” As a public company, we will be subject to additional reporting and other obligations, such as the reporting requirements of the Exchange Act, the applicable requirements of the Sarbanes-Oxley Act, and the applicable listing standards of                 . For example, the Exchange Act requires, among other things, we file annual, quarterly, and current reports with respect to our business, financial condition, and results of operations. Compliance with these rules and regulations will increase our legal and financial compliance costs and increase demand on our systems, particularly after we are no longer an emerging growth company. In addition, as a public company, we may be subject to stockholder activism, which can lead to additional substantial costs, distract management, and impact the manner in which we operate our business in ways we cannot currently anticipate. As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors.

Many members of our management team have limited experience managing a publicly traded company, interacting with public company investors, and complying with the increasingly complex laws pertaining to public companies, and certain members joined us more recently. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition, and results of operations.

Unanticipated changes in our effective tax rate and additional tax liabilities, including as a result of our international operations or implementation of new tax rules, could harm our future results of operations.

We are subject to income taxes in the United States and certain foreign jurisdictions, including Brazil, India, Ireland, Japan, and Turkey. Our effective tax rate could be subject to volatility or adversely affected by several factors, many of which are outside of our control, including changes in the mix of earnings and losses in countries with differing statutory tax rates, changes in tax laws, rates, treaties, and regulations or the interpretation of the same, changes to the financial accounting rules for income taxes, the outcome of current and future tax audits, examinations or administrative appeals, certain non-deductible expenses, any decision to repatriate non-U.S. earnings for which we have not previously provided for taxes and the valuation of deferred tax assets and liabilities. Increases in our effective tax rate would reduce profitability or increase losses. Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and there may be material differences between our forecasted and actual tax rates. In addition, we are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. Changes in tax and trade laws, treaties, or regulations, or their interpretation or enforcement, have become more unpredictable and may become more stringent, which could have a material adverse effect on our tax position. We made significant judgments and assumptions in the interpretation of new laws and in our calculations reflected in our financial statements.

As we expand the scale of our international business activities, any changes in the United States or foreign taxation of such activities may increase our worldwide effective tax rate and harm our business, financial condition, and results of operations.

 

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On an ongoing basis, we are subject to examination by federal, state, local, and foreign tax authorities on income, employment, sales, and other tax matters. While we regularly assess the likelihood of adverse outcomes from such examinations and the adequacy of our provision for taxes, there can be no assurance that such provision is sufficient and that a determination by a tax authority would not have an adverse effect on our business, financial condition, and results of operations. We believe our income, employment, and transactional tax liabilities are reasonably estimated and accounted for in accordance with applicable laws and principles, but an adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results of operations for that period. Certain risks relating to employment taxes and sales taxes are described in more detail under “—Taxing authorities may successfully assert that we have not properly collected or remitted, or in the future should collect or remit, sales and use, gross receipts, value added, or similar taxes, or employment, payroll, or withholding taxes, and may successfully impose additional obligations on us, and any such assessments, obligations, or inaccuracies could adversely affect our business, financial condition, and results of operations.”

Recently, the Biden administration proposed to adjust the U.S. corporate tax rate, along with other tax measures, such as international business operations reform and/or global minimum tax. Many countries and organizations such as the Organization for Economic Cooperation and Development are also actively considering changes to existing tax laws or have proposed or enacted new laws, such as those relating to digital tax, that could increase our tax obligations in countries where we do business or cause us to change the way we operate our business. Any of these developments or changes in federal, state, or international tax laws or tax rulings could adversely affect our effective tax rate and our operating results.

Taxing authorities may successfully assert that we have not properly collected or remitted, or in the future should collect or remit, sales and use, gross receipts, value added, or similar taxes, or employment, payroll, or withholding taxes, and may successfully impose additional obligations on us, and any such assessments, obligations, or inaccuracies could adversely affect our business, financial condition, and results of operations.

The application of non-income, or indirect, taxes, such as sales and use tax, value-added tax, goods and services tax, business tax, and gross receipt tax, to businesses like ours is a complex and evolving issue. Significant judgment is required on an ongoing basis to evaluate applicable tax obligations, and as a result, amounts recorded are estimates and are subject to adjustments. In many cases, the ultimate tax determination is uncertain because it is not clear how new and existing statutes might apply to our business. In addition, governments are increasingly looking for ways to increase revenue, which has resulted in discussions about tax reform and other legislative action to increase tax revenue, including through indirect taxes. Such taxes could adversely affect our financial condition and results of operations.

We are subject to indirect taxes, such as sales, use, value-added, and goods and services taxes, in the United States and other foreign jurisdictions, and we do not collect and remit indirect taxes in all jurisdictions in which we operate on the basis that such indirect taxes are not applicable to us. Certain jurisdictions in which we do not collect and remit such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. A successful assertion by one or more tax authorities requiring us to collect taxes in jurisdictions in which we do not currently do so or to collect additional taxes in a jurisdiction in which we currently collect taxes could result in substantial tax liabilities, including taxes on past sales, as well as penalties and interest, could discourage learners, instructors, or organizations from using our platform, could increase the cost for consumers using our platform, or could otherwise harm our business, financial condition, and results of operations. Further, even where we are collecting taxes and remitting them to the appropriate authorities, we may fail to accurately calculate, collect, report, and remit such taxes.

Additionally, one or more states, localities, or other taxing jurisdictions may seek to impose additional reporting, record-keeping, or indirect tax collection obligations on businesses like ours. For example, taxing authorities in the United States and other countries have identified e-commerce platforms as a means to calculate, collect, and

 

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remit indirect taxes for transactions taking place over the internet, and are considering related legislation. After the U.S. Supreme Court decision in South Dakota v. Wayfair Inc., certain states have enacted laws that would require tax reporting, collection, or tax remittance on items sold online, even where the online seller lacks a physical presence or nexus in that state. Requiring tax reporting or collection could decrease learner or instructor activity, which would harm our business. These state laws could require us to incur substantial costs in order to comply, including costs associated with tax calculation, collection, and remittance and audit requirements, which could make our offerings less attractive and could adversely affect our business, financial condition, and results of operations.

Also, tax rules of certain countries, including the United States, generally require payors to report payments to unrelated parties to the applicable taxing authority and to withhold a percentage of certain amounts and remit such amounts to the applicable taxing authority. Failure to comply with such reporting and withholding obligations with respect to payments we make to our instructors could result in the imposition of liabilities for the underwithheld amounts, fines, and penalties. In addition, a tax authority could assert that we should be withholding employment or other taxes from payments to instructors. In 2020, we began approaching the Internal Revenue Service, or the IRS, to address our historical withholding amounts for instructors. Due to our large number of instructors and the amounts paid to each, process failures with respect to these reporting obligations could result in financial liability and other consequences to us if we were unable to remedy such failures in a timely manner.

As a result of these and other factors, the ultimate amount of tax obligations owed may differ from the amounts recorded in our financial statements and any such difference may adversely affect our results of operations in future periods in which we change our estimates of our tax obligations or in which the ultimate tax outcome is determined.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

As of December 31, 2020, we had federal net operating loss carryforwards, or NOLs, to offset future taxable income of approximately $167.0 million. The $85.4 million of federal NOLs generated in taxable years beginning prior to January 1, 2018 begin expiring in 2030 if not utilized. The $81.6 million of federal NOLs generated in taxable years beginning after December 31, 2017 have an indefinite carryforward period. Realization of these NOLs depends on our future profitability. We have incurred net losses since our inception, and we expect to continue to incur net losses in the near future. As such, there is a risk that our existing NOLs generated before 2018 could expire unused and be unavailable to offset future income tax liabilities if we never achieve profitability. This may require us to pay federal income taxes in future years even if our NOLs were otherwise sufficient to offset our federal taxable income in such years. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. Our NOLs may be similarly impaired under state laws. For example, California recently enacted legislation limiting our ability to use our state NOLs for taxable years 2020, 2021 and 2022. We have recorded a full valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of these assets. If our NOLs and other tax attributes expire before utilization or are subject to limitations, our business and financial results could be harmed.

In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs and federal tax credit carryforwards to offset its post-change taxable income, or reduce its federal income tax liability, may be limited. In general, an “ownership change” occurs when there is a cumulative change in our equity ownership by “5 percent shareholders” that exceeds 50 percentage points over a rolling three-year period. We may be limited as to the amount of our current NOLs and tax credit carryforwards that can be utilized each year as a result of previous ownership changes. We have performed a Section 382 study to determine any potential Section 382 limitations on the utilization of our net operating loss carryforwards and tax credit carryforwards and have determined that our company experienced two ownership changes with our Series A and A-1 preferred stock offering in September 2011 and with our Series B preferred stock offering in November 2012. We have estimated that the

 

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gross U.S. federal NOL carryforwards from 2010 to 2012 that would be subject to limitation are approximately $3.6 million. If it is determined that we have in the past experienced additional ownership changes, or if we experience one or more ownership changes as a result of this offering, future transactions in our stock, some of which are outside our control, or both, our ability to use our NOLs and federal tax credit carryforwards to reduce future taxable income and liabilities may be further limited. Similar limitations may apply under state tax laws.

Our results of operations, which we report in U.S. dollars, could be adversely affected if currency exchange rates fluctuate substantially in the future.

We conduct our business across more than 180 countries around the world. As we continue to expand our international operations, we will become more exposed to the effects of fluctuations in currency exchange rates. This exposure is the result of selling in multiple currencies and operating in foreign countries where the functional currency is the local currency. In 2020, 43% of our sales were denominated in currencies other than U.S. dollars, including euros, Indian rupees, British pounds sterling, Brazilian reais, and Japanese yen. Our expenses, by contrast, are primarily denominated in U.S. dollars. As a result, any increase in the value of the U.S. dollar against these foreign currencies could cause our revenue to decline relative to our costs, thereby decreasing our gross margins. Because we conduct business in currencies other than U.S. dollars, but report our results of operations in U.S. dollars, we also face remeasurement exposure to fluctuations in currency exchange rates, which could hinder our ability to predict our future results and earnings and could materially impact our results of operations. We do not currently maintain a program to hedge exposures to non-U.S. dollar currencies.

Our reported financial results may be adversely affected by changes in generally accepted accounting principles.

Generally accepted accounting principles are subject to interpretation by the Financial Accounting Standards Board, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported results of operations and could affect the reporting of transactions completed before the announcement of a change. It is difficult to predict the impact of future changes to accounting principles or our accounting policies, any of which could negatively affect our reported results of operations.

Risks related to ownership of our common stock

The trading price of our common stock may be volatile, and you could lose all or part of your investment.

Prior to this offering, there has been no public market for shares of our common stock. The initial public offering price of our common stock will be determined through negotiation among us and the underwriters. This price does not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our common stock following this offering. In addition, the trading price of our common stock following this offering is likely to be volatile and could be subject to fluctuations in response to various factors, some of which are beyond our control. These fluctuations could cause you to lose all or part of your investment in our common stock since you might be unable to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the trading price of our common stock include the following:

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

volatility in the trading prices and trading volumes of technology stocks;

 

   

changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

 

   

sales of shares of our common stock by us or our stockholders;

 

   

failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

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the financial projections we may provide to the public, any changes in those projections, or our failure to meet those projections;

 

   

announcements by us or our competitors of new services or platform features;

 

   

the public’s reaction to our press releases, other public announcements, and filings with the SEC;

 

   

rumors and market speculation involving us or other companies in our industry;

 

   

actual or anticipated changes in our results of operations or fluctuations in our results of operations;

 

   

actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally;

 

   

litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

 

   

actual or perceived privacy or security breaches or other incidents;

 

   

developments or disputes concerning our intellectual property or other proprietary rights;

 

   

announced or completed acquisitions of businesses, services, or technologies by us or our competitors;

 

   

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

   

changes in accounting standards, policies, guidelines, interpretations, or principles;

 

   

any significant change in our management;

 

   

general economic conditions and slow or negative growth of our markets;

 

   

other events or factors, including those resulting from war, incidents of terrorism, natural disasters, public health concerns or epidemics, such as the COVID-19 pandemic, natural disasters, or responses to these events; and

 

   

our anticipated uses of net proceeds from this offering.

In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

An active trading market for our common stock may not develop or be sustained, and you may not be able to sell your shares at or above the initial public offering price, or at all.

Prior to this offering, there has been no public market for our common stock. Although we expect that our common stock will be approved for listing on                 , an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price for our common stock was determined through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of the common stock after the offering. This initial public offering price may vary from the market price of our common stock after the offering. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price.

If you purchase our common stock in this offering, you will incur immediate and substantial dilution.

The initial public offering price is substantially higher than the pro forma net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you purchased our common stock in this offering, at the initial public offering price of $                 per share, you would experience an immediate dilution of $                per share, the difference between

 

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the price per share you pay for our common stock and our pro forma net tangible book value per share as of December 31, 2020, after giving effect to the issuance by us of                shares of our common stock in this offering. See “Dilution” for additional information.

A significant portion of our common stock is restricted from immediate resale but may be sold into the market in the near future, which could depress the market price of our common stock.

The market price of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our directors, executive officers, and significant stockholders, a large number of shares of our common stock becoming available for sale, or the perception in the market that such sales could occur. Upon the closing of this offering, we will have approximately                  shares of common stock outstanding, assuming no exercise of the underwriters’ over-allotment option. All of the shares of common stock sold in this offering will be freely transferable without restriction or additional registration under the Securities Act.

All of our executive officers and directors and the holders of substantially all of our equity securities are subject to lock-up agreements with the underwriters of this offering that restrict the equityholders’ ability to transfer shares of our common stock for periods of at least                  days from the date of this prospectus. Subject to the restrictions under Rule 144 under the Securities Act,                  shares of common stock outstanding after this offering will be eligible for resale                  days after the date of this prospectus upon the expiration of lock-up agreements or other contractual restrictions. In addition, at any time with or without public notice,                  may in its discretion release shares subject to such lock-up agreements prior to the expiration of this                  -day lock-up period. See “Shares eligible for future sale” for additional information. As these resale restrictions end, the market price of our common stock could decline if the holders of those shares sell them or are perceived by the market as intending to sell them.

In addition, based on our capitalization as of December 31, 2020, 18,932,979 shares issuable upon exercise of outstanding options will also be eligible for sale upon expiration of the              -day lock-up period. We intend to register all of the shares underlying outstanding options and any shares underlying other equity incentives we may grant in the future for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance to the extent permitted by any applicable vesting requirements and the lock-up agreements described above. Sales of stock by these stockholders or the perception that such sales could occur could adversely affect the trading price of our common stock.

Holders of                  shares of our common stock have registration rights. For more information, see “Description of capital stock—Registration rights.” Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act, which are subject to the limitations of Rule 144. Sales of securities by any of these stockholders or the perception that such sales could occur could adversely affect the trading price of our common stock.

Future sales and issuances of our common stock or rights to purchase common stock could result in additional dilution to our stockholders and cause the price of our common stock to decline.

We may issue additional common stock, convertible securities, or other equity following the completion of this offering. We also expect to issue common stock to our employees, directors, and other service providers pursuant to our equity incentive plans. Such issuances will be dilutive to investors and could cause the price of our common stock to decline. New investors in such issuances could also receive rights senior to those of holders of our common stock.

 

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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about us, our business or our industry, of if they change their recommendation regarding our common stock adversely, the market price and trading volume of our common stock could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us, our business, our market, or our competitors. The analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If any of the analysts who cover us change their recommendation regarding our common stock adversely, provide more favorable relative recommendations about our competitors, or publish inaccurate or unfavorable research about our business, the price of our securities would likely decline. If few securities analysts commence coverage of us, or if one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets and demand for our securities could decrease, which could cause the price and trading volume of our common stock to decline.

We do not expect to pay dividends in the foreseeable future.

We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not anticipate declaring or paying any dividends to holders of our capital stock in the foreseeable future. Consequently, stockholders must rely on sales of their shares of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

We have broad discretion over the use of net proceeds from this offering and may not use them effectively.

We cannot specify with any certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in “Use of proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these proceeds effectively could adversely affect our business, financial condition, and results of operations. Pending their use, we may invest our proceeds in a manner that does not produce income or that loses value. Our investments may not yield a favorable return to our investors and may negatively impact the price of our common stock.

Our directors, executive officers, and principal stockholders beneficially own a substantial percentage of our common stock and will be able to exert significant control over matters subject to stockholder approval.

After this offering, our directors, executive officers, and holders of more than 5% of our outstanding common stock, together with their respective affiliates, will beneficially own shares representing approximately     % of our outstanding common stock, or    % of our common stock if the underwriters exercise their option to purchase additional shares in full. As a result, these stockholders, if they act together, will be able to influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock.

Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws might delay, discourage or prevent a merger, tender offer or proxy contest, thereby depressing the market price of our common stock.

Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law, or the DGCL, may discourage, delay or prevent a change in control by prohibiting us from engaging in a business

 

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combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that may make any acquisition of our company more difficult or delay or prevent changes in control of our management. Among other things, these provisions will:

 

   

provide that our board of directors is expressly authorized to make, alter or repeal our bylaws;

 

   

authorize our board of directors to issue shares of preferred stock and determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval;

 

   

provide that the authorized number of directors may be changed only by resolution of the board of directors;

 

   

provide that all vacancies on our board of directors and all newly created directorships may only be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum, except as otherwise required by law, our governing documents or resolution of our board of directors, and subject to the rights of the holders of our preferred stock;

 

   

establish that our board of directors is divided into three classes, with each class serving staggered three-year terms;

 

   

provide that a director may only be removed from the board of directors by the stockholders for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the issued and outstanding capital stock entitled to vote in the election of directors;

 

   

prohibit cumulative voting (therefore allowing the holders of a plurality of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose);

 

   

require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent;

 

   

require that stockholders give advance notice to nominate directors or submit proposals for consideration at stockholder meetings;

 

   

provide that special meetings of our stockholders may be called only by the board of directors, the Chairperson of the board of directors, our Chief Executive Officer or our President;

 

   

provide that, unless we otherwise consent in writing, a state or federal court located within the State of Delaware shall be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim against us arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation, and our amended and restated bylaws, or (4) any action asserting a claim against us governed by the internal affairs doctrine;

 

   

provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act; and

 

   

require a super-majority vote of stockholders to amend some of the provisions described above.

These provisions, alone or together, could delay, discourage, or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

 

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Our amended and restated bylaws will provide, to the fullest extent permitted by law, that the Court of Chancery of the State of Delaware and the federal district courts of the United States are the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, stockholders, or employees and, in turn, discourage lawsuits against our directors, officers, or employees.

Our amended and restated bylaws will provide that, to the fullest extent permitted by applicable law and unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another state court in Delaware or the federal district court for the District of Delaware) will be the sole and exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a claim of breach of a fiduciary duty owed by any of our directors, stockholders, officers, or other employees to us or our stockholders; any action arising pursuant to any provision of the DGCL, our certificate of incorporation, or our bylaws; and any other action asserting a claim that is governed by the internal affairs doctrine. This exclusive forum provision would not apply to any action brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts of the United States have exclusive jurisdiction.

Our amended and restated bylaws will also provide that, to the fullest extent permitted by applicable law and unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States will be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. The enforceability of similar exclusive federal forum provisions in other companies’ organizational documents has been challenged in legal proceedings, and while the Delaware Supreme Court and certain other state courts have ruled that this type of exclusive federal forum provision is facially valid under Delaware law, there is uncertainty as to whether other courts would enforce such provisions and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. This exclusive federal forum provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts of the United States have exclusive jurisdiction.

These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our current or former directors, officers, stockholders, or other employees, which may discourage such lawsuits against us and our current and former directors, officers, stockholders, and other employees. Alternatively, if a court were to find either exclusive forum provision in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving such action in other jurisdictions, all of which could have a material adverse effect on our business, financial condition, and results of operations.

 

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Special note regarding forward-looking statements

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy, development plans, expected research and development costs, as well as plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these terms or other similar expressions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

   

our expectations regarding our financial and operating performance, including our expectations regarding our revenue, costs, UB Net Dollar Retention Rate, Segment Revenue, Segment Gross Profit Margin, Adjusted EBITDA, and Adjusted EBITDA Margin;

 

   

our ability to successfully execute our business and growth strategy;

 

   

our ability to attract and retain learners, instructors, and enterprise customers;

 

   

the timing and success of new features, integrations, capabilities, and other platform enhancements by us, or by our competitors to their offerings, or any other changes in the competitive landscape of our markets and industry;

 

   

anticipated trends, developments, and challenges in our industry, business, and the markets in which we operate;

 

   

the size of our addressable markets, market share, and market trends, including our ability to grow our business internationally;

 

   

the effects of the COVID-19 pandemic on our business, the market for online learning solutions, and the global economy generally;

 

   

the sufficiency of our cash, cash equivalents, and investments to meet our liquidity needs;

 

   

our ability to develop and protect our brand and reputation;

 

   

our expectations and management of future growth;

 

   

our expectations concerning relationships with third parties;

 

   

our ability to attract, retain, and motivate our skilled personnel, including members of our senior management team;

 

   

our expectations regarding the effects of existing and developing laws and regulations, including with respect to taxation and privacy, data protection, and cybersecurity;

 

   

our ability to maintain the security and availability of our platform;

 

   

our ability to successfully defend litigation brought against us;

 

   

our ability to successfully identify, execute, and integrate any potential acquisitions;

 

   

our expectations regarding our income and other tax liabilities;

 

   

our ability to effectively manage our exposure to fluctuations in foreign currency exchange rates;

 

   

our ability to obtain, maintain, protect, and enforce our intellectual property and proprietary information;

 

   

the increased expenses associated with being a public company; and

 

   

our intended use of the net proceeds from this offering.

We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate, and financial trends that we believe may affect our business, financial condition, results of operations, and prospects, and these forward-looking statements are not guarantees of future

 

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performance or development. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties, and assumptions described in “Risk factors” and elsewhere in this prospectus. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein until after we distribute this prospectus, whether as a result of any new information, future events, or otherwise.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.

 

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Market, industry, and other data

Unless otherwise indicated, estimates and information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations, market position, market opportunity, and market size, are based on industry publications and reports generated by third-party providers, other publicly available studies, and our internal sources and estimates. In some cases, we do not expressly refer to the sources from which this information derived. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such information. Although we are responsible for all of the disclosure contained in this prospectus and we believe the information from the industry publications and other third-party sources included in this prospectus is reliable, we have not independently verified the accuracy or completeness of the data contained in such sources. Forecasts and other forward-looking information with respect to industry, business, market, and other data are subject to the same qualifications and additional uncertainties regarding the other forward-looking statements in this prospectus. See “Special note regarding forward-looking statements” for additional information.

Among others, we refer to estimates and other information compiled by the following sources:

 

   

Arizton, a market research and intelligence company;

 

   

HolonIQ, a company that provides market intelligence research on the global education market; and

 

   

The World Economic Forum, an international non-governmental organization.

 

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Use of proceeds

We estimate that the net proceeds to us from the sale of the shares of our common stock in this offering will be approximately $                 million, or approximately $                 million if the underwriters exercise their option to purchase additional shares in full, based upon the assumed initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $                 per share would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $                 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $                 million, assuming the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

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

We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds we receive from this offering to acquire or invest in businesses, products, services, or technologies. However, we do not have agreements or commitments for any material acquisitions or investments at this time. We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering.

Accordingly, we will have broad discretion in using these proceeds. Pending their use, we intend to invest the net proceeds of this offering primarily in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit, or direct or guaranteed obligations of the U.S. government.

 

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Dividend policy

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant.

 

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Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2020:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to (1) the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 85,391,338 shares of common stock immediately prior to the completion of this offering and (2) the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering; and

 

   

on a pro forma as adjusted basis to reflect (1) the pro forma adjustments set forth above and (2) our issuance and sale of                  shares of common stock in this offering at the assumed initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma as adjusted information set forth below is illustrative only and will depend on the actual initial public offering price and other terms of this offering determined at pricing. You should read this information in conjunction with our audited consolidated financial statements and the related notes appearing elsewhere in this prospectus, as well as in “Selected consolidated financial and other data” and “Management’s discussion and analysis of financial condition and results of operations.”

 

     As of December 31, 2020  
     Actual     Pro forma      Pro forma
as adjusted(1)
 
     (in thousands, except per share amounts)  
Cash and cash equivalents    $                 175,031     $                                    $                                
  

 

 

   

 

 

    

 

 

 

Redeemable convertible preferred stock, $0.00001 par value, 86,348,646 shares authorized; 85,391,338 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     274,104       
Stockholders’ (deficit):        

Common stock, $0.00001 par value; 150,000,000 shares authorized, 35,627,503 shares issued and outstanding, actual;              shares authorized,              shares issued and outstanding, pro forma;             shares authorized,             shares issued and outstanding, pro forma as adjusted

           

Preferred stock, $0.00001 par value; no shares authorized, issued and outstanding, actual;             shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

           

Additional paid-in capital

     117,818       

Accumulated deficit

     (378,503     
  

 

 

   

 

 

    

 

 

 
Total stockholders’ (deficit) equity      (260,685     
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 13,419     $        $    
  

 

 

   

 

 

    

 

 

 

 

(1)

Each $1.00 increase or decrease in the assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $                million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares of common stock offered by us would increase or decrease, as applicable, each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $                 million, assuming the assumed initial public offering price of $                 per share, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters’ option to purchase additional shares is exercised in full, our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity, and total capitalization as of December 31, 2020, would be $                 million, $                 million, $                 million, and $                 million, respectively.

 

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The number of shares of our common stock issued and outstanding, pro forma and pro forma as adjusted in the table above is based on 121,018,841 shares of our common stock outstanding as of December 31, 2020, and excludes:

 

   

18,932,979 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2020 with a weighted-average exercise price of $5.23 per share, which excludes 95,475 stock appreciation rights outstanding that will be settled in cash upon exercise;

 

   

3,917,161 shares of common stock reserved for future issuance under our 2010 Equity Incentive Plan, as amended, or our 2010 Plan, as of December 31, 2020, provided that we will cease granting awards under our 2010 Plan upon the effectiveness of our 2021 Equity Incentive Plan, or our 2021 Plan;

 

   

12,595 warrants to purchase shares of our redeemable convertible preferred stock outstanding as of December 31, 2020 with a weighted-average exercise price of $0.196 per share, which were fully exercised in January 2021;

 

   

                shares of common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with this offering; and

 

   

                shares of common stock reserved for future issuance under our 2021 Employee Stock Purchase Plan, or our 2021 ESPP, which will become effective in connection with this offering.

Our 2021 Plan and our 2021 ESPP each will provide for annual automatic increases in the number of shares reserved thereunder, and our 2021 Plan will also provide for increases to the number of shares that may be granted thereunder based on awards under our 2010 Plan that expire, are forfeited, or otherwise repurchased by us, as more fully described in “Executive compensation—Employee benefit and stock plans.”

 

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Dilution

If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

Our historical net tangible book value (deficit) as of December 31, 2020 was $(274.8) million, or $(7.71) per share of our common stock. Our historical net tangible book value (deficit) is the amount of our total tangible assets less our total liabilities and redeemable convertible preferred stock, which is not included within our stockholders’ (deficit) equity. Historical net tangible book value (deficit) per share represents historical net tangible book value (deficit) divided by the number of shares of our common stock outstanding as of December 31, 2020.

Our pro forma net tangible book value as of December 31, 2020 was $                 million, or $                 per share of our common stock. Pro forma net tangible book value represents the amount of our total tangible assets less our total liabilities. Pro forma net tangible book value per share represents pro forma net tangible book value divided by the total number of shares outstanding as of December 31, 2020, after giving effect to the automatic conversion of all outstanding shares of our redeemable convertible preferred stock as of December 31, 2020 into an aggregate of 85,391,338 shares of our common stock immediately prior to the completion of this offering as if such conversion had occurred on December 31, 2020.

After giving further effect to our sale of                 shares of common stock in this offering at the assumed initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2020 would have been approximately $                 million, or approximately $                 per share. This represents an immediate increase in pro forma net tangible book value per share of approximately $                  to our existing stockholders and an immediate dilution in pro forma net tangible book value per share of approximately $                 to investors purchasing shares of common stock in this offering.

Dilution per share to investors purchasing shares of common stock in this offering is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the assumed initial public offering price per share paid by investors purchasing shares of common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors (without giving effect to any exercise by the underwriters of their option to purchase additional shares):

 

Assumed initial public offering price per share       $                                     

Historical net tangible book value (deficit) per share as of December 31, 2020

     

Pro forma increase in net tangible book value per share as of December 31, 2020

   $       
  

 

 

    

 

 

 

Pro forma net tangible book value per share as of December 31, 2020

                                           

Increase in pro forma net tangible book value per share attributable

to investors purchasing shares of common stock in this offering

     
  

 

 

    

 

 

 
Pro forma as adjusted net tangible book value per share      
Dilution per share to investors participating in this offering       $    

Each $1.00 increase or decrease in the assumed initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the pro forma as adjusted net tangible book value per share after this offering by approximately $                 per share and the dilution to investors purchasing shares of common stock in this offering by approximately $                 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase of 1.0 million shares in the number of shares offered by us would increase the pro forma as adjusted net tangible book value per share after this

 

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offering by approximately $                and decrease the dilution per share to investors purchasing shares of common stock in this offering by approximately $                , assuming no change in the assumed initial public offering price and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each decrease of 1.0 million shares in the number of shares offered by us would decrease the pro forma as adjusted net tangible book value per share after this offering by approximately $                and increase the dilution per share to investors purchasing shares of common stock in this offering by approximately $                , assuming no change in the assumed initial public offering price and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase                additional shares of common stock in this offering in full at the assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus and assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, the pro forma as adjusted net tangible book value per share after this offering would be approximately $                per share, and the dilution per share to investors purchasing shares of common stock in this offering would be approximately $                per share.

The following table summarizes, on the pro forma as adjusted basis described above, as of December 31, 2020, the number of shares of common stock purchased from us, the total consideration paid, or to be paid, and the weighted-average price per share paid, or to be paid, by existing stockholders and by investors purchasing shares in this offering at the assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares purchased     Total consideration    

Weighted-

average

price per

share

 
(dollar amounts in thousands, except per
share amounts)
   Number     Percent     Amount     Percent  
Existing stockholders before this offering                                                         %         $                                                     %         $                        
Investors purchasing shares in this offering            $    
  

 

 

   

 

 

   

 

 

   

 

 

   

Total

       100%     $         100%    
  

 

 

   

 

 

   

 

 

   

 

 

   

The table above assumes no exercise of the underwriters’ option to purchase                 additional shares in this offering. If the underwriters’ option to purchase additional shares is exercised in full, the number of shares of our common stock held by existing stockholders would be reduced to            % of the total number of shares of our common stock outstanding after this offering, and the number of shares of common stock held by investors purchasing shares of common stock in the offering would be increased to              % of the total number of shares outstanding after this offering.

Each $1.00 increase or decrease in the assumed initial public offering price of $                  per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by investors purchasing shares in this offering by approximately $                 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Similarly, each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the total consideration paid by investors purchasing shares in this offering by approximately $                 million, assuming no change in the assumed initial public offering price.

The foregoing tables and calculations (other than the historical net tangible book value calculation) are based on the 121,018,841 shares of our common stock outstanding as of December 31, 2020, and excludes:

 

   

18,932,979 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2020 with a weighted-average exercise price of $5.23 per share, which excludes 95,475 stock appreciation rights outstanding that will be settled in cash upon exercise;

 

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3,917,161 shares of common stock reserved for future issuance under our 2010 Plan as of December 31, 2020, provided that we will cease granting awards under our 2010 Plan upon the effectiveness of our 2021 Plan;

 

   

12,595 warrants to purchase shares of our redeemable convertible preferred stock outstanding as of December 31, 2020 with a weighted-average exercise price of $0.196 per share, which were fully exercised in January 2021;

 

   

                shares of common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with this offering; and

 

   

                shares of common stock reserved for future issuance under our 2021 ESPP, which will become effective in connection with this offering.

Our 2021 Plan and our 2021 ESPP each will provide for annual automatic increases in the number of shares reserved thereunder, and our 2021 Plan will also provide for increases to the number of shares that may be granted thereunder based on awards under our 2010 Plan that expire, are forfeited, or otherwise repurchased by us, as more fully described in “Executive compensation—Employee benefit and stock plans.”

To the extent that any outstanding options are exercised or new options are issued under the equity benefit plans, or we issue additional shares of common stock or other securities convertible into or exercisable or exchangeable for shares of our capital stock in the future, there will be further dilution to investors purchasing shares of common stock in this offering.

 

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Selected consolidated financial and other data

The following tables summarize our selected consolidated financial and other data for the periods and as of the dates indicated. We have derived our selected consolidated statements of operations data for the years ended December 31, 2019 and 2020, and the consolidated balance sheet data as of December 31, 2019 and 2020, from our audited consolidated financial statements appearing elsewhere in this prospectus. You should read the following selected consolidated financial and other data together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus and the information in “Management’s discussion and analysis of financial condition and results of operations.”

 

     Year ended December 31,  
                 2019                             2020              
    

(in thousands, except share and

per share amounts)

 
Consolidated statements of operations data:     
Revenues    $ 276,327     $ 429,899  
Cost of revenues(1)      143,510       209,253  
  

 

 

   

 

 

 
Gross profit      132,817       220,646  
  

 

 

   

 

 

 
Operating expenses:   

 

 

 

 

 

 

 

Sales and marketing(1)

     126,436       192,600  

Research and development(1)

     34,379       50,643  

General and administrative(1)

     40,033       50,783  
  

 

 

   

 

 

 

Total operating expenses

     200,848       294,026  
  

 

 

   

 

 

 
Operating loss      (68,031     (73,380
Other income (expense), net:   

 

 

 

 

 

 

 

Interest income (expense), net

     87       (1,146

Other income (expense), net

     (384     55  
  

 

 

   

 

 

 

Total other income (expense), net

     (297     (1,091
  

 

 

   

 

 

 
Net loss before taxes      (68,328     (74,471
Income tax provision      (1,375     (3,149
Net loss      (69,703     (77,620
  

 

 

   

 

 

 
Net loss per share attributable to common stockholders, basic and diluted(2)    $ (2.57   $ (2.33
  

 

 

   

 

 

 
Weighted-average shares used to calculate net loss per share attributable to common stockholders - basic and diluted(2)      27,096,379       33,384,438  
  

 

 

   

 

 

 
Pro forma net loss per share attributable to common stockholders—basic and diluted(2)     
    

 

 

 
Weighted-average shares used to compute pro forma net loss per share attributable to common stockholders—basic and diluted(2)   

 

 

 

 

 

 

 

    

 

 

 

 

(1)

Stock-based compensation expense included in the consolidated statements of operations data above was as follows:

 

     Year Ended December 31,  
     2019      2020  
Cost of revenues    $ 299        $ 418  
Sales and marketing      3,001          7,518  
Research and development      2,357          5,232  

General and administrative

     3,306          18,450  
  

 

 

    

 

 

 
Total stock-based compensation expense    $                     8,963        $                 31,618  
  

 

 

    

 

 

 

 

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(2)

See Note 2 and Note 14 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our net loss per share attributable to common stockholders, basic and diluted and the weighted-average shares used to compute these amounts. Pro forma basic net loss per share attributable to common stockholders, basic and diluted is computed to give effect to the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 85,391,338 shares of common stock immediately prior to the completion of this offering. Incremental stock-based compensation incurred in connection with the completion of this offering is immaterial.

 

     As of December 31,  
     2019     2020  
     (in thousands)  

Consolidated balance sheet data:

    

Total current assets

   $                 84,380     $             236,964  

Total assets

     117,302       282,096  

Total current liabilities

     183,899       263,813  

Total liabilities

     187,247       268,677  

Redeemable convertible preferred stock

     155,645       274,104  

Additional paid-in capital

     75,293       117,818  

Accumulated deficit

     (300,883     (378,503

 

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Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risk and uncertainties described under “Risk factors” and elsewhere in this prospectus. Our actual results may differ materially from those contained in or implied by any forward-looking statements. This discussion and analysis of our financial condition and results of operations has been updated for the immaterial restatement referenced in Note 15 to the consolidated financial statements included elsewhere in this prospectus.

Overview

Our mission is to create new possibilities for people and organizations everywhere by connecting them to the knowledge and skills they need to succeed in a changing world. Our marketplace platform, with thousands of up-to-date courses in dozens of languages, provides the tools that learners, instructors, and organizations need to achieve their goals and reach their full potential.

We believe traditional education and training methods are fast becoming outdated. Technological advancements and novel industries have significantly altered the types of skills required of workers, and lifelong training and continuous skills acquisition are becoming the norm. There is a clear need to expand access to learning across traditional barriers such as geography and social demographics.

Udemy operates a two-sided marketplace where our instructors develop content to meet learner demand. Courses can be accessed through our direct-to-consumer or Udemy Business, or UB, offerings. Our platform provides over 39 million learners with access to over 158,000 courses in over 65 languages and 180 countries.

Udemy courses address learning objectives such as reskilling or upskilling in technology and business, enhancing soft skills, and personal development. We analyze platform data to better determine our learners’ needs, helping us match individuals with relevant courses and, within UB, learning paths for a more personalized experience. Our learners also receive access to interactive learning tools such as quizzes, exercises, and instructor questions-and-answers, or Q&A.

Within our marketplace and UB catalog, we provide learners with high-quality content by prioritizing courses based on factors such as learner feedback and ratings, topic relevance, content quality, and instructor engagement.

Our business has experienced rapid growth. From 2019 to 2020, our revenue grew 55.6% to $429.9 million, which includes over 100% growth in UB revenue, although we incurred net losses of $69.7 million and $77.6 million during 2019 and 2020. As of December 31, 2020, we had an accumulated deficit of $378.5 million.

 

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Our history

The following is a timeline of certain key events in our history:

 

 

LOGO

Our business model

Our platform allows learners all over the world to access a wide breadth of affordable and relevant content from over 56,000 instructors, many of which are subject-matter experts in their field and/or experienced industry practitioners. We combine high-quality content, insights and analytics, and technology into a single, unified platform that is purpose-built to meet the specific needs of both consumers and enterprises. Our consumer segment targets individual learners seeking to obtain hands-on learning, gain valuable job skills to advance their professional careers, or learn a new personal skill through our consumer offering. Our enterprise segment focuses on helping business and government customers upskill and reskill their employees and public servants through our UB offering.

Consumer. Consumer learners come to Udemy for relevant, affordable, and high-quality content. Our global platform helps address the learning objectives of over 36 million consumer learners, which include reskilling or upskilling, enhancing soft skills, and personal enhancement. Consumer learners can purchase lifetime access to individual courses on our online platform or they can subscribe to a consumer subscription offering. We analyze data gathered on our platform to better determine our learners’ most relevant needs, helping us match them with relevant courses and learning paths, driving higher satisfaction. Learners from across the world have access to global and local instructors, providing learning skills that may be unique to their particular geographies. Once a learner enrolls in a course, we strive to provide an effective learning experience through assessments, labs, Q&As, and interactive exercises.

 

 

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Substantially all of our consumer revenue is derived from consumer learners’ enrollment to individual courses on our online platform. Our payment terms generally require advance payment through the use of a credit card. Once a successful course enrollment purchase transaction is completed, we grant the learner lifetime access to the purchased course content on the online platform, which can be accessed and consumed by the learners on an on-demand basis even if an instructor later unpublishes the course. We recognize consumer revenue for single course purchases ratably over an estimated four-month service period for a learner’s consumption of marketplace course content.

In 2019 and 2020, 82% and 76%, respectively, of our revenue was derived from our consumer offering.

Udemy Business. UB helps over 7,000 global customers, including companies, non-profit organizations, and government agencies, achieve the learning needs of their talent bases, drawn by the real-world expertise and experience of our instructors. Out of our platform’s deep content catalog, we have curated over 8,000 of the most highly engaging and relevant courses, purposely selected to meet the needs and standards of these companies, organizations, and agencies. We undergo a rigorous selection process across a wide set of criteria in determining the courses that will be offered as part of our UB offerings, including learner feedback and rating, relevancy of topic covered, quality of the content, and instructor experience.

Revenue from our UB offering is derived from the sale of subscriptions to our UB customers, which provide on-demand access to a catalog of courses over a subscription term, as well as additional features and functionalities such as single sign-on, analytics and strategic learning path management functionality. The majority of our customers subscribe to our UB offering through one-year contracts, although a growing number of our customers subscribe through multi-year contracts. Subscription fees are primarily based on the number of license seats. We source our customer leads through a combination of field marketing and leveraging our existing learner base. Our growing consumer learner base and course offerings allow us to identify customer prospects, provide data and insights, increase operating scale, improve search engine optimization performance and provide an effective and efficient way to identify quality courses for our UB offerings. We sell subscriptions to our platform to customers primarily through our direct sales team, who identify and engage with potential customers. Once a customer has adopted our platform, we focus not only on driving continued use of our offerings by that customer, but also expanding the relationship by increasing the number of license seats sold to that customer.

In 2019 and 2020, 18% and 24%, respectively, of our revenue was derived from our UB offering.

Key business metrics

In addition to the measures presented in our consolidated financial statements, we use the key business metrics identified below to help us assess the health of our community, evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.

Paid learners

Our paid learners consist of consumer learners who purchase single courses or subscriptions through our direct-to-consumer offering. We treat each account that registers with a unique email as a potential paid learner and adjust for any spam, test accounts, and cancellations. Our paid learner count is not intended as a measure of active engagement, as not all paid learners are active at any given time or over any given period. We believe that the number of paid learners is an important indicator of the growth of our business and potential future revenue trends.

Udemy Business customers

We count the total number of UB customers at the end of each period. For purposes of determining our customer count, we treat each customer account that has a corresponding contract as a unique customer, and a single organization with multiple divisions, segments, or subsidiaries may be counted as multiple customers. We define a UB customer as a customer who purchases Udemy via our direct sales force or through our self-service platform. We believe that the number of UB customers and our ability to increase this number is an important indicator of the growth of our UB and future revenue trends.

 

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UB Net Dollar Retention Rate

We disclose our UB Net Dollar Retention Rate, or NDRR, as a measure of our enterprise revenue growth. We believe NDRR is an important metric that provides insight into the long-term value of our subscription agreements and our ability to retain, and grow revenue from, our UB customers. We calculate NDRR as the total annualized recurring revenue, or ARR, at the end of a trailing twelve-month period divided by the total ARR at the beginning of a trailing twelve-month period for the cohort of UB customers active at the beginning of the trailing twelve-month period. Total ARR at the end of a trailing twelve-month period is calculated as ARR at the beginning of a trailing twelve-month period that is then adjusted for upsells, downsells, and churns for the same cohort of customers during that period. ARR is the total annualized run-rate revenue of all UB customers with active licenses. Our NDRR is expected to fluctuate in future periods due to a number of factors, including the growth of our revenue base, the penetration within our learner base, expansion of products and features, and our ability to retain our UB customers.

Segment Revenue and Segment Gross Profit

Our revenue is generated from our consumer and UB offerings, each of which is an individual segment of our business. Segment Revenue represents the revenue recognized from each of these offerings and is a key measure of the performance of our platform, and in turn drives our financial performance. We also monitor Segment Gross Profit as a key metric to help evaluate the financial performance of our individual segments and our business as a whole. Segment Gross Profit is defined as Segment Revenue less Segment Costs of Revenue, which include content costs, hosting and platform costs, customer support services, and payment processing fees that are allocable to each segment. Segment Gross Profit excludes amortization of capitalized software, depreciation, and stock-based compensation allocated to cost of revenues as our chief operating decision maker does not include the information in his measurement of the performance of the operating segments. Content costs, which are payments made to our instructors, are the largest individual component of Segment Cost of Revenue. We expect to increase the percentage of our revenue derived from our enterprise segment over time, which we expect will improve our gross margins.

 

     Year Ended December 31,  
     2019      2020  
  

 

 

 
Segment Revenue and Segment Gross Profit    (in thousands)  

Consumer Segment Revenue

   $             225,500      $             326,454  

Consumer Segment Gross Profit

     106,831        160,650  

Enterprise Segment Revenue

     50,827        103,445  

Enterprise Segment Gross Profit

     31,921        67,926  

Key factors affecting our performance

We believe that the growth of our business and our future success are dependent upon many factors. While each of these factors presents significant opportunities for us, these factors also pose challenges that we must successfully address in order to sustain the growth of our business and enhance our results of operations.

Ability to attract and engage new learners and Udemy Business customers

To grow our business, we must attract new learners and UB customers efficiently and increase engagement on our platform over time. From inception through December 31, 2020, over 36 million consumer learners from more than 180 countries had registered on Udemy, accounting for 486 million course enrollments, and we had attracted over 7,000 UB customers. We added over 13 million new learners during 2020, representing annual growth of our total learner base of 53%.

We acquire a substantial portion of our learners via organic channels and also use paid marketing to further enhance the growth of our learner base. Our organic channels include those outside of our paid market efforts, such as a Udemy brand name internet search. Once we bring new learners onto our platform, we work to create a best-in-class experience to encourage engagement and drive learning and career outcomes.

 

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Ability to retain and expand our existing learner and customer relationships

Our efforts to grow our existing relationships with our consumer learners are focused on increasing their engagement and converting free learners into paid learners. New learners to our platform typically begin to engage with our free courses, which serve as a funnel to grow our total learner base and drive referrals to our paid other offerings. We constantly analyze data gathered on our platform to better determine our learners’ most relevant needs, which helps us match learners with relevant courses and learning paths, driving higher satisfaction, increasing enrollments, and converting learners into paid learners. We highlight key features that encourage conversion to our paid offerings through our marketing efforts, which include campaigns targeting existing learners, personalized recommendations, and performance marketing across leading social media platforms. Once a learner enrolls in a course, we strive to provide an effective learning experience through labs, and the ability for learners to communicate with instructors for expedient answers to their questions and through interactive exercises.

Our efforts to grow our UB offering are focused primarily on corporate and government customers. We deploy a land-and-expand strategy with our UB customers that focuses on acquiring new customers and efficiently growing our relationships with existing customers, beginning with either individual users or departmental deployments. Historically, we have expanded from individual to department to multi-department to enterprise-wide sales as our value is proven. Building upon this success, we believe a significant opportunity exists for us to acquire new UB customers and expand our existing UB customers’ use of our platform by identifying new use cases and increasing the size of existing deployments.

We often enter into customized contractual arrangements with our UB customers in which we offer more favorable pricing terms in exchange for larger total contract values that accompany larger deployments. As we drive a greater portion of our revenue through our deployments with UB customers, we expect that our revenue will continue to grow significantly, but the price we charge UB customers per seat may decline, which could reduce margins in the future. Our business and results of operations will depend on our ability to continue to drive higher usage of our platform within our existing customer base and our ability to add new customers.

Ability to source in-demand content from our instructors

We believe that learners and UB customers are attracted to Udemy largely because of the high quality and wide selection of content our instructors offer. Continuing to source in-demand content and credentials from our instructors will be an important factor in attracting learners and UB customers and growing our revenue over time.

As of December 31, 2020, we attracted over 56,000 instructors from around the world to our platform. Instructors share their knowledge on Udemy for a myriad of reasons, from financial to brand-building to giving back. We believe instructors are attracted to Udemy because we offer access to a global market with over 39 million learners. Our model allows instructors who elect to charge for courses to share directly in the economic upside of the course content they contribute and the growth of our platform. We have an aligned incentive model where payments to instructors are proportional to course sales on our platform. In 2020, our paid instructors earned $161.4 million from Udemy for their courses, with average paid instructor earnings of $2,950 and over 9,000 global instructors receiving more than $1,000 in earnings. The breadth of instructors and courses contributes to the wide variety of content topics available on our platform, as well as meaningful depth within most content categories. We believe that this combination of breadth and depth helps foster competition and choice on our platform and attracts learners and enterprise customers. We enable instructors to innovate and engage on our platform by giving instructors proprietary tools including marketplace insights, the ability to review feedback from learners, and dashboards to help generate more relevant content and manage their brand and course marketing. When we offer content as part of the UB and consumer subscription offerings, our instructors agree to contribute such content exclusively through our platform, as discussed elsewhere in this prospectus, which we believe demonstrates our ability to increase the value of our platform through unique content. We experienced minimal turnover among top instructors in 2019 and 2020.

 

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Impact of mix of consumer and enterprise segments

Our mix of business among our consumer and enterprise segments is shifting, and this shift will affect our financial performance. We incur content costs in the form of payments to our instructors, generally determined as a percentage of total revenue generated from their content. These costs totaled $109.2 million in 2019 and $161.4 million in 2020, or 39.5% and 37.5% of total annual revenue, respectively. Content costs, which are included in our cost of revenue, vary significantly for our different offerings. For our enterprise segment, content costs are incurred based on a percentage of total subscription revenue which is allocated to instructors pro rata based on consumption of their content. Content costs in our consumer segment were historically primarily driven by whether the learner is acquired organically, through Udemy’s marketing efforts, or by an instructor coupon. Beginning in May 2021, content costs for our consumer segment will be the same whether learners are acquired organically or through Udemy’s marketing efforts. Content costs historically have been and will continue to be substantially highest for learners acquired by instructor coupon compared to learners acquired through Udemy’s marketing efforts. Content costs for our enterprise segment are lower relative to our consumer segment. The mix of customer acquisition methods in our consumer segment will substantially impact our financial performance. In 2020, content costs as a percentage of revenue were 42% for our consumer segment and 25% for our enterprise segment. We presently expect that revenue from our enterprise segment will grow faster than our consumer segment, which will be beneficial to our overall margins.

Ability to expand our international footprint

We generated 59% and 61% of our revenue outside North America in 2019 and 2020, respectively. We see a significant opportunity to expand our offerings into regions with large underserved adult learning populations. We have invested, and plan to continue to invest, in personnel and marketing efforts to support our international growth and expand our international operations as part of our strategy to grow our customer and learner base, particularly among our UB customers.

Our investment in growth

We are actively investing in our business as we believe that we are only beginning to penetrate our market opportunity, and we intend to continue to invest in our future growth. We anticipate that our operating expenses will increase as we continue to build our sales and marketing efforts, expand our course catalog, expand our employee base, and invest in our technology development. The investments we make in our platform are designed to address relevant topics for our existing learners and to attract new learners to our platform to grow our revenue opportunity and to improve our operating results in the long term. Any investments we make in our sales and marketing organization, in encouraging the development of new content, and in expanding our platform offerings and capabilities, will occur in advance of the benefits from such investments, making it difficult to determine if we are efficiently allocating our resources in these areas.

Pace of adoption of cloud-based skill development solutions

Our ability to grow our learner base and drive market adoption of our platform is affected by the overall demand for cloud-based skill development solutions. The market for cloud-based skill development is less mature than the market for in-person instructor-led-training and potential customers may be slow or unwilling to migrate from these legacy approaches. We believe that as technology becomes increasingly critical to business operations, the need for cloud-based skill development solutions, particularly an integrated enterprise-grade platform such as ours, will increase and our customer base and the breadth and deployment of usage in our customer base will also increase. Furthermore, we believe that we have established a leadership position in the market for cloud-based technology learning. However, it is difficult to predict customer adoption rates and demand, the future growth rate and size of the market for cloud-based skill development solutions, or the entry of competitive solutions.

Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. To limit the spread of the virus, governments have imposed various restrictions, including emergency declarations at the

 

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federal, state and local levels, school and business closings, quarantines, “shelter at home” orders, restrictions on travel and trade, limitations on social or public gatherings and other social distancing measures.

We have taken precautionary measures intended to help minimize the risk of COVID-19 to our employees, including transitioning the majority of our employees to remote work and restricting business travel, which have contributed to immaterial decreases in our operating expenses, primarily travel and entertainment expense. We believe that our ability to meet the needs of our customers, end users and instructors has not been materially affected by these precautions. We have not incurred any material increases in our operating expenses as a result of the COVID-19 pandemic.

With the COVID-19 pandemic, there has been a significant increase in the adoption of online learning solutions, a trend we believe will continue over the long-term. We believe that this heightened demand for online learning solutions from individuals and businesses contributed in part to the significant increase in revenue we experienced beginning in the second quarter of 2020. However, we are not able to quantify the proportion of the increase in revenue that is attributable to the COVID-19 pandemic as opposed to other factors contributing to our growth in recent periods. Furthermore, the circumstances that have accelerated the growth of our business during the COVID-19 pandemic may not continue in the future, and the growth rate of our revenue, as well as our learner and customer base, may decline in future periods as the effects of the COVID-19 pandemic abate.

The extent to which the COVID-19 pandemic impacts our business depends on future developments that are highly uncertain and cannot be predicted at this time. For more information, see “Risk factors—Risks related to our business and operations—The COVID-19 pandemic could affect our business, financial condition, and results of operations in volatile and unpredictable ways.”

Components of results of operations

Revenues

We derive revenues from contracts with paid consumer learners and UB customers from access to our online learning platform. We recognize revenue from both our paid consumer learners and UB customers.

Consumer revenue consists of individual course content purchases made by individual learners, as well as our consumer subscription offerings. Consumer revenue includes the gross transaction value paid by the learner at checkout, net of (a) actual and estimated refunds and (b) passthrough taxes collected from learners and remitted to governmental authorities. After a successful checkout, consumer learners receive a non-exclusive lifetime license to the digital course content in addition to stand-ready access to the Udemy platform hosting services needed to access the content. Access to the online content on the Udemy platform represents a series of distinct services as we continually provide access to and fulfill our hosting obligation to the learner. This series of distinct services represents a single performance obligation that is satisfied over the estimated service period. Revenue is recognized ratably over the estimated service period for consumer marketplace revenue, which is four months from the date of enrollment and over the contractual subscription term for consumer subscription customers.

Enterprise revenue primarily relates to enterprise license subscription contracts with annual or multi-year subscription terms. Enterprise subscriptions are generally billed in advance on a quarterly or annual basis. Subscription revenue excludes any taxes to be remitted to governmental authorities. Access to the Udemy platform represents a series of distinct services as we continually provide access to course content and fulfill our obligation to the UB customer over the subscription term. Because the series of distinct services represents a single performance obligation that is satisfied over time, we recognize revenue ratably over the contractual subscription term.

We are the principal with respect to revenue generated from sales to consumer and UB customers as we control the performance obligation and are the primary obligor with respect to delivering access to content to our customers.

 

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Cost of revenues

Cost of revenues primarily consists of content costs, which are the payments to our instructors. Content costs are driven by the means by which we acquired the learner consuming the content. For courses offered on Udemy’s consumer marketplace, instructors earn a specific percentage of the net sale amount when a learner purchases the instructor’s course. For courses offered through Udemy Business or a consumer subscription offering, instructors earn a pro-rata share of a monthly instructor payments pool for that subscription offering. Each month, Udemy calculates the revenue for each subscription offering, with a fixed percentage allocated as an instructor payments pool. Instructors whose content is included in the collection earn a pro-rata portion of this pool based on the number of minutes of consumption their courses achieved that month.

Content costs as a percentage of revenue for our UB and consumer subscription offerings are lower relative to individual course content purchases in our consumer offering. As a result, shifts in the mix between our two offerings is expected to be a significant driver of our content costs. Content costs are recorded as cost of revenue in the period earned by our instructors. For consumer single course purchases, content costs are incurred at the time of purchase. As consumer course content revenue is recognized ratably over an estimated service period of four months, consumer gross margins are lower in the period of purchase, and higher in the remaining periods of the estimated service period over which revenue is recognized. For our subscription based UB offering, content costs are incurred based on monthly subscription fees, and margins are more stable from period to period.

Cost of revenue also includes payment and mobile processing fees, costs associated with hosting digital content, and employee related expenses for our customer support organization, including salaries, benefits, stock-based compensation, facilities and other expenses, depreciation of network equipment, and amortization of capitalized software. We expect cost of revenue to generally decrease as a percentage of revenue as we increase the percentage of revenue derived from our UB offering.

Operating expenses

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs are the most significant component of our operating expenses and consist of salaries, benefits, bonuses, stock-based compensation, and commissions. Our operating expenses also include allocated costs of facilities, information technology, depreciation, and amortization. Although our operating expenses may fluctuate from period to period, we currently expect our operating expenses to increase in absolute dollars over time.

Sales and marketing

Our sales and marketing expenses consist primarily of direct advertising and promotions costs, as well as personnel and personnel-related costs, including stock-based compensation and costs related to customer and instructor acquisition, customer support efforts, and brand marketing. Sales and marketing expenses also consist of costs incurred for hosting and customer support services related to providing our platform to free learners. We expect sales and marketing expenses to increase in absolute dollars as our business grows. In addition, we expect sales and marketing expenses as a percentage of revenue to vary from period to period but generally decrease over the long term.

Research and development

Our research and development expenses consist primarily of personnel and personnel-related costs, including stock-based compensation and costs related to the ongoing management, maintenance, and expansion of features and services offered on our platform. Research and development costs also include contracted services, supplies, and other miscellaneous expenses. We believe that continued investment in our platform is important to our future growth and to maintain and attract learners to our platform. As a result, we expect research and development expenses to increase in absolute dollars. In addition, we expect research and development expenses as a percentage of revenue to vary from period to period but generally decrease over the long term.

 

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General and administrative

Our general and administrative expenses consist primarily of personnel and personnel-related costs, including stock-based compensation and costs related to our executive, legal, finance, and human resources departments, as well as charges for indirect tax reserves, bad debt expense, professional fees, and other corporate expenses.

Following the closing of this offering, we expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, and increased expenses for insurance, investor relations, and professional services. We expect general and administrative expenses to increase in absolute dollars as our business grows. In addition, we expect general and administrative expenses as a percentage of revenue to vary from period to period but generally decrease over the long term.

Interest income (expense), net

Interest income (expense), net consists primarily of interest income earned on our cash, cash equivalents, and marketable securities. It also includes amortization of premiums and accretion of discounts related to our marketable securities. Interest income varies each reporting period based on our average balance of cash, cash equivalents, and marketable securities during the period and market interest rates. Interest expense consists primarily of interest expense recorded related to certain indirect tax reserves. Interest expense was immaterial for the periods presented.

Other income (expense), net

Other income (expense), net consists primarily of foreign currency transaction gains and losses.

Income tax provision

Our income tax provision consists primarily of income taxes in certain foreign jurisdictions in which we conduct business. We have a full valuation allowance against our U.S. federal and state deferred tax assets as the realization of the full amount of these deferred tax assets is uncertain, including net operating loss carryforwards and tax credits related primarily to research and development. We expect to maintain this full valuation allowance until it becomes more likely than not that the deferred tax assets will be realized.

 

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Results of operations

The following table summarizes our results of operations for the periods presented. The results below are not necessarily indicative of results to be expected for future periods.

 

     Year Ended December 31,  
             2019                      2020          
     (in thousands)  

Consolidated statements of operations

     

Revenues

   $             276,327        $             429,899    

Cost of revenues (1)

     143,510          209,253    
  

 

 

    

 

 

 

Gross profit

     132,817          220,646    
  

 

 

    

 

 

 

Operating expenses:

     

Sales and marketing(1)

     126,436          192,600    

Research and development(1)

     34,379          50,643    

General and administrative(1)

     40,033          50,783    
  

 

 

    

 

 

 

Total operating expenses

     200,848          294,026   
  

 

 

    

 

 

 

Operating loss

     (68,031)         (73,380)   
  

 

 

    

 

 

 

Other income (expense), net

     

Interest income (expense), net

     87          (1,146)   

Total, other income (expense), net

     (384)         55    
  

 

 

    

 

 

 
Net loss before taxes      (68,328)         (74,471)   
  

 

 

    

 

 

 
Income tax provision      (1,375)         (3,149)   
  

 

 

    

 

 

 
Net loss    $ (69,703)       $ (77,620)   
  

 

 

    

 

 

 

 

(1)

Costs and expenses include stock-based compensation expense as follows:

 

     Year Ended December 31,  
             2019                  2020          
     (in thousands)  
Cost of revenues    $ 299       $ 418   
Sales and marketing      3,001         7,518   
Research and development      2,357         5,232   
General and administrative                       3,306                         18,450   
  

 

 

    

 

 

 
Total stock-based compensation expense    $ 8,963       $ 31,618   
  

 

 

    

 

 

 

 

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The following table summarizes our results of operations as a percentage of revenue for each of the periods indicated:

 

     Year Ended December 31,  
                 2019                              2020              

Consolidated statements of operations

     

Revenues

     100%         100%   

Cost of revenues

                                 52                                          49        
  

 

 

    

 

 

 

Gross profit

     48             51       
  

 

 

    

 

 

 

Operating expenses:

     

Sales and marketing

     46             45       

Research and development

     12             12       

General and administrative

     14             12       
  

 

 

    

 

 

 

Total operating expenses

     72             69       
  

 

 

    

 

 

 

Operating loss

     (24)            (18)      

Other income (expense), net

     

Interest income (expense), net

     0             0       

Total other income (expense), net

     0             0       
  

 

 

    

 

 

 
Net loss before taxes      (24)             (18)      
Income tax provision      0             (1)      
  

 

 

    

 

 

 
Net loss      (24)%         (19)%   
  

 

 

    

 

 

 

Comparison of the years ended December 31, 2019 and 2020

Revenues

 

     Year Ended December 31,      Change  
             2019                      2020              $      %  
Revenues    (dollars in thousands)  

Consumer

   $             225,500       $             326,454         100,954         45%  

Enterprise

   $ 50,827       $ 103,445         52,618         104%  
  

 

 

    

 

 

    

 

 

    
Total revenues    $ 276,327       $ 429,899       $             153,572         56%  
  

 

 

    

 

 

    

 

 

    

Revenue for 2019 was $276.3 million, compared to $429.9 million for 2020. Revenue increased by $153.6 million, or 56% compared to 2019. For 2019, consumer and enterprise revenue was $225.5 million and $50.8 million, or 82% and 18% of total revenue, respectively, compared to $326.5 million and $103.4 million, or 76% and 24% of total revenue, respectively, for 2020. The increase in revenue in 2020 was primarily driven by the significant expansion of our learner base, which resulted in a substantial number of additional paid learners, as well as significant growth in our UB customers. These trends were accelerated in part due to the effects of the COVID-19 pandemic.

For 2020, total consumer revenue increased by $101.0 million, or 45%, compared to 2019. The increase in consumer revenue was primarily driven by an increase in paid learners. Pricing was not a significant driver of the increase in revenue.

For 2020, total enterprise revenue increased by $52.6 million, or 104%, compared to 2019. The increase in enterprise revenue was primarily driven by volume increases of new UB customers, as well as net expansions of licensed seats in our existing UB customer base. Pricing was not a driver of the increase in revenue.

 

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Cost of revenues, gross profit and gross margin

 

     Year Ended December 31,     Change  
             2019                     2020             $      %  
     (dollars in thousands)  
Cost of revenues    $             143,510     $             209,253     $             65,743        46%  
Gross profit      132,817       220,646       87,829        66%  
Gross margin      48     51     

Cost of revenue for 2019 was $143.5 million, compared to $209.3 million for 2020. The increase in revenue resulted in an overall increase of $52.2 million in costs related to content costs. Content costs for the consumer and enterprise segments were $95.9 million and $13.3 million for 2019, respectively, compared to $136.0 million and $25.4 million for 2020, respectively. Content costs as a percentage of revenue for the consumer and enterprise segments were 43% and 26% for 2019, respectively, compared to 42% and 25% for 2020, respectively. In our consumer segment, credit card and mobile processing fees increased by $6.3 million in 2020 as compared to 2019. In our enterprise segment, customer support fees increased by $4.1 million in 2020 as compared to 2019. Additionally, there was a $1.3 million increase in third-party cloud hosting costs and an increase of $2.0 million in amortization expense of capitalized software.

Gross margin was 48% for 2019, compared to 51% for 2020. The increase in gross margin was primarily due to a shift in mix of revenue toward our enterprise business.

Operating expenses

 

    Year Ended December 31,      Change  
    2019      2020      $      %  
Operating expenses:     (dollars in thousands)  

Sales and marketing

  $         126,436      $         192,600      $         66,164                        52%  

Research and development

    34,379        50,643        16,264        47%  

General and administrative

    40,033        50,783        10,750        27%  
 

 

 

    

 

 

    

 

 

    
Total operating expenses   $ 200,848      $ 294,026      $ 93,178        46%  
 

 

 

    

 

 

    

 

 

    

Sales and marketing. Sales and marketing expenses for 2019 were $126.4 million, compared to $192.6 million for 2020. The $66.2 million increase in sales and marketing expense was primarily due to higher direct advertising and promotion costs of $38.5 million, higher personnel-related expenses of $13.2 million, mainly driven by additional headcount in our sales force to support increased demand for our platform, an increase in stock based compensation expenses of $4.6 million, and an increase in amortization of deferred contract acquisition costs driven by an expansion of our UB customer base over time.

Research and development. Research and development expenses for 2019 were $34.4 million, compared to $50.6 million for 2020. The $16.3 million increase was primarily due to higher personnel-related expenses of $13.2 million, mainly driven by additional headcount as well as a $2.9 million increase in stock-based compensation.

General and administrative. General and administrative expenses for 2019 were $40.0 million, compared to $50.8 million for 2020. The $10.8 million increase in general and administrative expense was primarily due to an increase of $5.1 million in personnel-related expenses, mainly driven by additional headcount and a $15.1 million increase in stock-based compensation, offset by a decrease of $8.9 million related to charges for reserves on indirect taxes.

Total other income (expense), net

Total other income (expense), net for 2019 was $0.3 million, compared to $1.1 million for 2020. Total other income (expense) for 2019 reflected primarily interest expense on indirect tax reserve liabilities, offset by interest

 

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income earned on invested cash balances. Total other income (expense), net for 2020 reflected primarily interest expense on indirect tax reserve liabilities.

Due to sales and maturities of our portfolio of marketable securities during fiscal 2019, there were no outstanding marketable securities as of December 31, 2019 and 2020. Interest income was also lower during 2020 compared to 2019 due to these sales and maturities.

Income tax provision

 

    Year Ended December 31,      Change  
            2019                      2020              $      %  
 

 

  (dollars in thousands)  
Income tax provision   $         1,375      $         3,149      $         1,774                    129%  

For 2019, we recognized income tax expense of $1.4 million, compared to $3.1 million for 2020. The tax expenses for the years ended December 31, 2019 and December 31, 2020 were primarily due to foreign taxes.

Non-GAAP financial metrics

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA is a key performance measure that we use to assess our operating performance and the operating leverage in our business. As Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team and board of directors. In addition, it provides a useful measure for period-to-period comparisons of our business, as it removes the effect of certain non-cash expenses and certain variable charges.

We define Adjusted EBITDA as net loss attributable to common stockholders, adjusted to exclude:

 

   

interest expense (income), net;

 

   

provision for income taxes;

 

   

depreciation and amortization;

 

   

stock-based compensation expense; and

 

   

other expense (income), net.

We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue for the same period.

Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures, should be considered as supplemental in nature and are not meant as a substitute for the related financial information prepared in accordance with GAAP. Our definition may differ from the definitions used by other companies and therefore comparability may be limited. Other companies may not disclose similar metrics. Adjusted EBITDA and Adjusted EBITDA Margin have certain limitations in that they exclude the impact of certain expenses that are reflected in our consolidated statements of operations that are necessary to run our business. The limitations include the following:

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect the components of other interest income (expense), net, which consists primarily of interest income earned on our cash, cash equivalents, and marketable securities, amortization of premiums and accretion of discounts related to our marketable securities, and interest expense recorded related to certain indirect tax reserves;

 

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Adjusted EBITDA and Adjusted EBITDA Margin do not reflect period to period changes in taxes, income tax expense or the cash necessary to pay income taxes;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin exclude certain recurring, non-cash charges, such as depreciation of property and equipment and amortization of intangible assets, and although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA and Adjusted EBITDA Margin do not reflect all cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin exclude stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy; and

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect the components of other expense (income), net, which consists primarily of foreign currency transaction gains and losses.

The above items are excluded from Adjusted EBITDA and Adjusted EBITDA Margin because these items are non-cash in nature, or because the amount and timing of these items is unpredictable.

The following tables provide a reconciliation of net loss, the most directly comparable GAAP financial measure, to Adjusted EBITDA:

 

     Year Ended December 31,  
     2019      2020  
     (in thousands)  

Net loss

   $ (69,703)      $ (77,620)    

Adjusted to exclude the following:

     

Interest expense (income), net

     (87)          1,146     

Provision for income taxes

                     1,375                           3,149     

Depreciation and amortization

     8,740           11,055     

Stock-based compensation expense

     8,963           31,618     

Other expense (income), net

     384           (55)    
  

 

 

 

Adjusted EBITDA

   $ (50,328)        $ (30,707)    
  

 

 

 

Included in Adjusted EBITDA are sales tax, other indirect tax, and instructor withholding tax reserve charges of $11.7 million and $2.8 million for 2019 and 2020, respectively. In 2020, we implemented enhanced collection, withholding, and reporting processes related to the matters underlying the tax reserve charges, and as a result we expect that these expenses will decline in future years. For more information, see “—Critical accounting policies and estimates—Instructor withholding tax obligations.”

The following table provides a reconciliation of net loss margin, the most directly comparable GAAP financial measure, to Adjusted EBITDA Margin:

 

     Year Ended December 31,  
     2019      2020  
  

 

 

 
     (dollars in thousands, except percentages)  

Revenue

   $                     276,327      $                     429,899  

Net loss

   $ (69,703    $ (77,620

Net loss margin

     (25 )%       (18 )% 

Revenue

   $ 276,327      $ 429,899  

Adjusted EBITDA

   $ (50,328    $ (30,707

Adjusted EBITDA margin

     (18 )%       (7 )% 

Net loss increased by $7.9 million in 2020 compared to the prior year and Adjusted EBITDA increased by $19.6 million in 2020 compared to the prior year primarily due to strong revenue growth in both our consumer and

 

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UB offerings in excess of the growth of our expenses. In 2020, we benefited from an acceleration of UB and consumer revenue growth beginning the second quarter due to an increase in the number of learners and UB customers as a result of the COVID-19 pandemic. We continued to benefit from higher levels of consumer and UB revenue compared to the prior year as these new learners and UB customers continued their usage of our platform during the third and fourth quarters.

Liquidity and capital resources

Since our inception, we have financed our operations primarily through proceeds from our redeemable convertible preferred stock issuances, as well as from revenue. We have generated significant net losses from our operations as reflected in our accumulated deficit of $378.5 million as of December 31, 2020. We have incurred operating losses and generated negative cash flows from operations as we have invested to support the growth of our business. Since our inception through December 31, 2020, we have raised aggregate net proceeds of $274.1 million through the sale of our redeemable convertible preferred stock. Our principal use of cash is to fund our operations to support our growth.

We believe that our existing cash and cash equivalents and marketable securities and our expected cash flows from operations will be sufficient to meet our cash needs for at least the next 12 months. Our remaining non-U.S. cash and cash equivalents have been earmarked for indefinite investment in our operations outside the U.S., thus no U.S. current or deferred taxes have been accrued. Over the longer term, our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our sales and marketing and research and development expenditures, the continuing market acceptance of our offerings, and any investments or acquisitions we may choose to pursue in the future. To execute on our strategic initiatives and continue to grow our business, we may incur operating losses and generate negative cash flows from operations in the future, and as a result, we may require additional capital resources. In the event that we need to borrow funds or issue additional equity, we cannot assure you that any such additional financing will be available on terms acceptable to us, if at all. In addition, any future borrowings may result in additional restrictions on our business and any issuance of additional equity would result in dilution to investors. If we are unable to raise additional capital when desired and on terms acceptable to us, our business, results of operations, and financial condition could be materially and adversely affected.

Cash flows

The following table summarizes our cash flows for the periods indicated:

 

    Year Ended December 31,  
    2019      2020  
    (in thousands)  
Net cash provided by (used in):     

Operating activities

  $             (16,455    $ 9,624  

Investing activities

    14,611        (14,537

Financing activities

    11,265                    131,093  
 

 

 

    

 

 

 
Net (decrease) increase in cash, cash equivalents and restricted cash   $ 9,421      $ 126,180  
 

 

 

    

 

 

 

Operating activities

Cash provided by (used in) operating activities mainly consists of our net loss adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization, amortization of deferred sales commissions, as well as the effect of changes in operating assets and liabilities during each period.

Our main source of operating cash is payments received from our customers. Our primary use of cash from operating activities are for personnel-related expenses, instructor payments, marketing and advertising expenses, indirect taxes, and third-party cloud infrastructure expenses.

 

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For 2019, net cash used in operating activities was $16.5 million, primarily consisting of our net loss of $69.7 million, adjusted for non-cash charges of $21.5 million and net cash inflows of $31.7 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were a $25.3 million increase in deferred revenue, resulting primarily from our enterprise business growth, a $17.7 million increase in accrued expenses and other current liabilities, partially offset by a $10.6 million increase in accounts receivable and a $10.7 million increase in deferred contract costs.

For 2020, net cash provided by operating activities was $9.6 million, primarily consisting of our net loss of $77.6 million, adjusted for non-cash charges of $50.4 million and net cash inflows of $36.9 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were a $54.7 million increase in deferred revenue, resulting primarily from our enterprise business growth, a $10.8 million increase accrued compensation and benefits, and a $6.6 million increase in content costs payable due to the growth of our business, partially offset by a $19.6 million increase in accounts receivable and a $18.9 million increase in deferred contract costs.

Cash provided by operating activities increased by $26.1 million during 2020, compared to 2019, primarily due to our business growth.

Investing activities

For 2019, net cash provided by investing activities was $14.6 million, primarily as a result of net sales and maturities of marketable securities, offset by capital expenditures for property and equipment and capitalized software costs.

For 2020, cash used in investing activities was $14.5 million, primarily as a result of capital expenditures for property and equipment and capitalized software costs.

Financing activities

For 2019, net cash provided by financing activities was $11.3 million, primarily as a result of proceeds from issuance of common stock following employee stock option exercises.

For 2020, net cash provided by financing activities was $131.1 million, primarily as a result of proceeds from our issuance of redeemable convertible preferred stock and issuance of common stock following employee stock option exercises.

Contractual obligations and commitments

Set forth below is information concerning our contractual commitments and obligations as of December 31, 2020 (in thousands):

 

    Payments Due by Period  
(in thousands)   Total     

Less than

1 Year

     1-3 Years      3-5 Years     

More than

5 Years

 
Operating lease commitments   $         25,298      $ 6,210      $         12,669      $         6,009      $ 410  
Purchase commitments(1)     9,037        8,075        888        74         
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total   $ 34,335      $         14,285      $ 13,557      $ 6,083      $             410  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Relates to non-cancelable commitments for network and cloud services in the ordinary course of business with varying expiration terms through October 31, 2022.

Our operating lease obligations as of December 31, 2020 were $25.3 million, which consist of payments related to leased facilities under operating lease agreements expiring through 2025. We have office facility operating leases in the United States, Ireland, and Turkey.

 

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Our purchase commitments as of December 31, 2020 were $9.0 million, which consisted of commitments related to cloud infrastructure providers, network service providers, and paid advertising vendors.

Of the $8.1 million purchase commitments due in less than 1 year as of December 31, 2020, $7.5 million related to a one-year agreement with a cloud hosting provider that we entered into in December 2020. with a committed spend of $7.5 million during 2021. We did not have material obligations or commitments with any other individual vendors as of December 31, 2020.

Off-balance sheet arrangements

During the period presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical accounting policies and estimates

Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below. See Note 2 to our consolidated financial statements appearing elsewhere in this prospectus for a description of our other significant accounting policies.

Revenue recognition

We derive revenue from contracts with customers for access to our online learning platform and related services. We derive our revenue from consumer and UB customer arrangements.

Consumer revenue—We generate revenue by selling access to course content on the Udemy platform to general consumers. Consumer offerings consist of (i) single course purchases and (ii) consumer subscription offerings. All contracts with consumer customers are billed in advance and require payment by the customer prior to accessing any course content.

Consumers who purchase individual courses gain access to course content by making a purchase on our marketplace platform. After checkout, consumers who purchase an individual course receive a non-exclusive lifetime license to the digital course content in addition to stand-ready access to the Udemy platform hosting services needed to access the content. Access to the online content on the Udemy platform represents a series of distinct services as we continually provide access to and fulfills its hosting obligation to the learner. The series of distinct services represents a single performance obligation that is satisfied over the estimated service period. Because consumers who purchase an individual course receive lifetime access to their purchased content, we believe the estimated service period best represents the time period during which learners access the online course content on the platform. The estimated service period for single course purchases is four months from the date of enrollment.

Consumer subscriptions are typically one-month in duration and paid in advance, with new customers able to sign up for a 7-day free trial period. Subscribers have continuous access to enroll in and consume an unlimited number of curated courses included in the subscription catalogue on our platform during the subscription term.

 

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The continual access to the platform represents a series of distinct services, as we continually provide access to, and fulfill our obligation to, the customer over the contract term. As a result, revenue is recognized ratably over the subscription term. Consumer subscriptions automatically renew at the end of each month. Customers may cancel the renewal of their subscription at any point but will retain their access to the platform until the end of the current subscription term.

Enterprise revenue—We sell subscription licenses to business, government, and university customers that provide users the ability to enroll in courses and receive certifications upon completion. UB contracts are typically between one and three years in length and consist of a fixed quantity of seat licenses, which allows each seat to access an unlimited number of course enrollments during the contract term. We recognize revenue ratably over the contracted period, after access has been granted to the UB customer, as learners have unlimited access to the course content during the contracted period.

We have determined that we are the principal to customers who purchase access to online individual course content or through a subscription offering, as we control the promised goods or services (i.e., access to course content via the Udemy platform) before it is transferred to the customer and are primarily responsible for fulfillment with respect to delivering access to course content. We also have substantial discretion to determine the pricing of our offerings. We therefore report revenue related to these arrangements based on the gross purchase price paid by customers.

Revenue from contracts with customers is recognized when control of promised services is transferred. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for these services. We determine revenue recognition in accordance with Accounting Standards Codification, or ASC, 606 through the following five steps:

 

  1)

Identify the contract with a customer

We determine a contract with a customer to exist when the contract is approved, each party’s rights regarding the services to be transferred can be identified, the payment terms for the services can be identified, the customer has the ability and intent to pay, and the contract has commercial substance. At contract inception, we evaluate whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance obligation. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience if available. Consumer customers are generally required to pay in advance using a credit card. Generally, UB customers are billed upfront annually for contracts with terms of one year or longer or in advance quarterly or semi-annually for contracts with terms of less than one year.

 

  2)

Identify the performance obligations in the contract

Performance obligations committed in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services and the products is separately identifiable from other promises in the contract. Customers do not have the ability to take possession of the software supporting the platform and, as a result, contracts are accounted for as service arrangements.

The non-exclusive lifetime access license associated with single course purchases and the licensed content associated with subscriptions are not considered distinct from the Udemy platform, because the course content is significantly integrated, and highly interdependent and interrelated with the platform. Specifically, the learner does not obtain control of the course content’s functionality without the Udemy platform. Accordingly, we have concluded there is a single, combined performance obligation, which is customer’s access to the online content on the Udemy platform, representing a series of distinct services

 

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as we continually provide access to and fulfills our obligation to allow access to licensed content and platform functionality to the learner.

 

  3)

Determine the transaction price

The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services to the customer. The prices for consumer and UB contracts are fixed at contract inception and do not contain significant estimates related to variable consideration. With respect to single course purchases, consumers may request a full refund within 30 days after the initial purchase transaction. We estimate and establish a refund reserve based on historical refund rates, which has historically been immaterial. None of our contracts contain a significant financing component. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental entities (e.g., sales and other indirect taxes).

 

  4)

Allocate the transaction price to performance obligations in the contract

Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on each performance obligation’s relative standalone selling price. As access to content is not considered distinct from the Udemy platform hosting services, the transaction price is allocated to a single performance obligation.

 

  5)

Recognize revenue when or as performance obligations are satisfied

Revenue is recognized at the time the related performance obligation is satisfied by transferring the control of the promised service to a customer. Revenue is recognized in an amount that reflects the consideration that we expect to receive in exchange for those services. We have a stand ready obligation to deliver our services continually throughout the requisite contract period, which is either lifetime access for consumer customers or the contractual subscription term for UB and consumer subscription customers. As such, we recognize revenue on a straight-line basis as we satisfy our performance obligation, using an estimated service period for individual consumers enrollments and the contractual subscription term for UB and consumer subscription customers.

Other than the circumstances noted below, no significant judgment has historically been required in determining the amount and timing of revenue from our contracts with customers.

Principal vs. agent—In order to determine if consumer and enterprise revenues should be reported gross or net of payments to third-party instructors, we evaluated whether Udemy acts as the principal in sales of its online course offerings. An entity is the principal if it controls a good or service before it is transferred to the end customer. Key indicators that we evaluated in determining gross versus net treatment included but are not limited to:

 

   

the nature of our promise to our customer, as well as the distinct performance obligation identified;

 

   

the underlying contract terms and conditions between the parties to the transaction;

 

   

which party is primarily responsible for fulfilling the promise to provide the specified good or service to the end customer;

 

   

which party has inventory risk before the specified good or service has been transferred to the end customer; and

 

   

which party has discretion in establishing the price for the specified good or service.

Based on an evaluation of the above indicators, we have determined that Udemy is the principal to learners who purchase access to online course content via our consumer or UB offerings. Udemy controls the promised goods or services (i.e., access to course content via the Udemy platform) before it is transferred to the customer and is primarily responsible for fulfillment with respect to delivering access to course content. Udemy is the entity which licenses content to learners as the agreements with our instructors grant us the right to sub-license content to our

 

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learners at our discretion. We also have substantial discretion to determine the pricing of our offerings. Therefore, we report the gross purchase price paid by the customer related to these arrangements in the revenues caption of the consolidated statements of operations, and the payments paid to instructors are reported within cost of revenues.

Estimated service term for consumer single course purchases—We consider a variety of data points when determining the estimated service period for a consumer learner’s consumption of a single course purchase, including, the weighted-average number of days between a learner’s first and last day that content is accessed on the platform, the average total hours consumed, the average number of days in which learner activity stabilizes, and the weighted-average number of days between learners’ enrollment and the last date the course content is accessed online. We also consider known online trends, the service periods of historical course content on our online platform, and, to the extent publicly available, the service periods of our competitors’ content that is similar in nature to Udemy’s. We believe that considering these factors enables us to determine the best representation of the time period during which our consumer learners access the online course content on our platform and therefore the service period over which we provide services to our learners. Determining the estimated service period is subjective and requires management’s judgment. Future usage patterns may differ from historical usage patterns, and therefore the estimated service period may change in the future. The estimated service period for single course purchase transactions is four months from the date of enrollment.

Common stock valuations

The fair value of the common stock underlying our stock-based awards has historically been determined by our board of directors, with input from management and corroboration from contemporaneous third-party valuations. We believe that our board of directors has the relevant experience and expertise to determine the fair value of our common stock. Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock at each grant date. These factors include:

 

   

contemporaneous valuations of our common stock performed by independent third-party specialists;

 

   

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

 

   

the prices paid for redeemable convertible preferred stock sold to third-party investors by us and prices paid in secondary transactions of common stock, including any tender offers;

 

   

the lack of marketability inherent in our common stock;

 

   

our actual operating and financial performance;

 

   

our current business conditions and projections;

 

   

the hiring of key personnel and the experience of our management;

 

   

our history and the introduction of new offerings;

 

   

our stage of development;

 

   

the likelihood of achieving a liquidity event, such as an initial public offering, a merger, or acquisition of our company given prevailing market conditions;

 

   

the operational and financial performance of comparable publicly traded companies; and

 

   

the U.S. and global capital market conditions and overall economic conditions.

Our board of directors determined the fair value of our common stock by first determining the enterprise value of our business, and then allocating the value among the various classes of our equity securities to derive a per share value of our common stock.

 

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For valuations conducted prior to March 31, 2021, the enterprise value of our business was primarily estimated by reference to the closest round of equity financing preceding the date of the valuation. Valuations conducted as of March 31, 2021, and onward utilized multiple valuation approaches, including a market approach as well as a market transaction method approach considering secondary stock sale or tender offer transactions in our common stock.

A market approach relies on an analysis of publicly traded companies similar in industry and/or business model to us. This methodology uses guideline companies to develop relevant market multiples and ratios for key metrics (such as revenue), which are then applied to the corresponding financial metrics to derive enterprise value. Since no two companies are perfectly comparable, premiums or discounts may also be applied to the metrics, for example, if its position in its industry is significantly different from the position of the guideline companies.

For valuations conducted prior to March 31, 2021, the enterprise value of our business as determined above was then allocated to common stock using the option-pricing method, or the OPM, which models each class of stock as a call option with a unique claim on our assets. Valuations conducted as of March 31, 2021, and onward used a combination of the OPM and probability weighted expected return method, or the PWERM, to allocate the enterprise value of our business among the various classes of stock. Under the PWERM, the value of a company’s particular equity class is estimated based on an analysis of future values for the entire enterprise assuming discrete future outcomes, such as an initial public offering, or IPO, of our common stock and other non-IPO outcomes. Share value is based upon the probability-weighted present value of these expected outcomes, as well as the rights of each class of preferred and common stock. Determining the fair value of the enterprise using the PWERM requires us to develop assumptions and estimates for both the probability of an IPO liquidity event and non-IPO outcomes, as well as the values we expect those outcomes could yield.

In addition, we considered any secondary transactions and tender offers involving our capital stock. In our evaluation of those transactions, we considered the facts and circumstances of each transaction to determine the extent to which they represented a fair value exchange and assigned the transactions an appropriate weighting in the valuation of our common stock. Factors considered include the nature of the transactions, the level of company involvement in the transactions, number of different buyers and sellers, transaction volume, timing relative to the valuation date, whether the transactions occurred between willing and unrelated parties, and whether the transactions involved investors with access to our financial information.

Application of these approaches and methodologies involves the use of estimates, judgments, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, and future cash flows, discount rates, market multiples, the selection of comparable public companies, and the probability of and timing associated with possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.

For valuations after the closing of this offering, our board of directors will determine the fair value of each share of underlying common stock based on the closing price of our common stock as reported on the date of grant. Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.

Stock-based compensation

We calculate the fair value of employee stock-based awards on the date of grant using the Black-Scholes option-pricing model. The expense is recognized over the service period for awards expected to vest. We recognize forfeitures as they occur.

We estimate the fair value of stock-based compensation utilizing the Black-Scholes option-pricing model, which is dependent upon several variables, such as the expected option term, expected volatility of our stock price over

 

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the expected term, expected risk-free interest rate over the expected option term, and expected dividend yield rate over the expected option term. These amounts are estimates and, thus, may not be reflective of actual future results, nor amounts ultimately realized by recipients of these grants. We recognize compensation expense on a straight-line basis over the requisite vesting period for each award.

A summary of the weighted-average assumptions we utilized to record compensation expenses for stock options granted during the years ended December 31, 2019 and 2020 is as follows:

 

     Year Ended December 31,  
     2019     2020  
Risk-free interest rate      2.2     0.5%   
Expected volatility                          48.1                     56.8%   
Expected life (in years)      6.0       5.9       
Expected dividend yield          —%   

The assumptions above are estimated as follows. Each of these assumptions is subjective and generally requires significant judgment to determine.

Fair value of common stock—Because our common stock is not yet publicly traded, the fair value was determined by our board of directors or a committee thereof. The board of directors or committee considers numerous objective and subjective factors to determine the fair value of our common stock each time awards are approved. Refer to “—Common stock valuations” above.

Expected term— The expected term of our options represents the period that the stock-based awards are expected to be outstanding. We have elected to use the midpoint of the stock options vesting term and contractual expiration period to compute the expected term, as we does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.

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

Expected volatility— Since we do not have a trading history of our common stock, we estimated volatility for option grants by evaluating the average historical volatility of a peer group of companies for the period immediately preceding the option grant for a term that is approximately equal to the options’ expected term.

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

We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates, which could materially impact our future stock-based compensation expense.

Instructor withholding tax obligations

We conduct operations in many tax jurisdictions throughout the United States and the rest of the world. We have an obligation to comply with information reporting and tax withholding requirements with regards to certain payments made to our U.S. and non-U.S. instructors. Under U.S. federal income tax rules, in the case where we withhold less than the correct amount of tax, we are liable for the correct amount that we were required to withhold, plus interest and potential penalties. We may be entitled to relief on certain payments if we can obtain documentation (e.g., taxpayer identification forms) from instructors establishing that the instructor payee qualifies for reduced withholding tax rates, or that the instructor payee reported the payments and paid the corresponding taxes owed.

Beginning in March 2020, we began collecting appropriate taxpayer identification forms from our instructors, assessing whether the forms justified a reduced rate of withholding or withholding exemption, and remitting

 

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withholding tax payments to the IRS where required. Prior to March 2020, we had not obtained appropriate taxpayer identification forms from instructors, nor remitted applicable tax withholding amounts to the IRS where required. In accordance with GAAP, we recorded a provision for our tax exposure when it was both probable that a liability had been incurred and the amount of the exposure could be reasonably estimated. Total accrued obligations related to withholding taxes, including estimated interest, were $20.9 million and $22.2 million as of December 31, 2019 and 2020, respectively. Changes to the withholding tax reserve and estimated interest are recorded in general and administrative expense and interest income (expense), respectively, in our consolidated statements of operations.

Evaluating potential outcomes for instructor withholding taxes is inherently uncertain and requires us to utilize various judgments, assumptions and estimates in determining our reserves. The instructor withholding provision estimate includes several key assumptions including, but not limited to, the tax characterization of our payments made to instructors, the historical lookback practices and scoping precedents of the IRS, the methods for sourcing of instructor payments to U.S. and non-U.S. jurisdictions, and management’s estimate of the relief on certain instructor payments to which we will be entitled. Accordingly, the ultimate resolution of our instructor withholding tax obligations may be greater or less than the amounts we have reserved.

Income taxes

We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our income tax expense and deferred tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.

We utilize the asset and liability method under which deferred tax assets and liabilities arise from the temporary differences between the tax basis of an asset or liability and our reported amount in the consolidated financial statements, as well as from net operating loss and tax credit carryforwards. Deferred tax amounts are determined by using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided for under currently enacted tax law. A valuation allowance is established if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations, and risks associated with estimates of future taxable income in assessing the need for a valuation allowance.

Recent accounting pronouncements

See Note 2 to our consolidated financial statements included elsewhere in this prospectus for information regarding recently issued accounting pronouncements.

JOBS Act transition period

We are an emerging growth company as defined in the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of certain accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

Quantitative and qualitative disclosures about market risk

We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business, including the effects of interest rate changes and foreign currency fluctuations. Information relating to quantitative and qualitative disclosures about these market risks is described below.

 

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Interest rate sensitivity

As of December 31, 2020, we had $175.0 million of cash and cash equivalents, which include on demand deposits and amounts in transit from certain payment processors for credit and debit card transactions. In addition, we had $2.9 million of restricted cash primarily due to the outstanding letter of credit related to the operating lease agreement for our corporate headquarters. Our cash and cash equivalents are held for working capital purposes. We did not hold any marketable securities or carry any fixed or variable rate debt as of and during 2020. Given the above facts and circumstances, hypothetical changes in interest rates of 10% would not result in a material impact to our consolidated financial statements.

Foreign currency risk

The reporting currency and functional currency of our foreign subsidiaries is the U.S. dollar. Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our consolidated statement of operations. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments, although we may choose to do so in the future. As such, a hypothetical 10% increase or decrease in current exchange rates could result in additional income or expense of $6.0 million.

 

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Business

Overview

Our mission is to create new possibilities for people and organizations everywhere by connecting them to the knowledge and skills they need to succeed in a changing world. Our marketplace platform, with thousands of up-to-date courses in dozens of languages, provides the tools that learners, instructors, and organizations need to achieve their goals and reach their full potential.

We believe traditional education and training methods are fast becoming outdated. Technological advancements and novel industries have significantly altered the types of skills required of workers, and lifelong training and continuous skills acquisition are becoming the norm. There is a clear need to expand access to learning and make it available across traditional barriers such as geography and social demographics.

Udemy operates a marketplace platform at the center of a vibrant knowledge network. We have created a new approach to learning that allows real-world experts to continuously create and update relevant content to our platform, where it becomes easily accessible to learners globally.

Our platform provides over 39 million learners with access to over 158,000 courses in over 65 languages and 180 countries. We define learners as people who have engaged with content through Udemy. They consist of both individuals who purchase single courses or subscriptions through our direct-to-consumer offering, and those who learn through UB, our employer-sponsored subscription offering.

Our over 56,000 instructors, supported by our platform’s course feedback and analytical tools, create high quality content in online learning—content that makes up our consumer and enterprise course catalogs. These instructors are expert industry practitioners for whom Udemy enables broad audience reach, and our aligned incentive model allows them to share in the economic upside of the course content they contribute because our instructor payments for course content are proportional to the sales of such course content on our platform.

Udemy is a two-sided marketplace where our instructors develop content to meet learner demand. Courses can be accessed through our direct-to-consumer or UB offerings. Courses on both offerings address learning objectives such as reskilling or upskilling in technology and business, enhancing soft skills, and personal development. We analyze data gathered to better determine our learners’ needs, helping us match individuals with relevant courses and, within UB, learning paths for a more personalized experience. Our learners also receive access to interactive learning tools such as quizzes, exercises, and instructor questions-and-answers, or Q&A.

Our UB offering helps over 7,000 global organizations, defined as companies of all sizes, nonprofits, and government agencies, support employees’ professional growth and personal development through learning. The UB course catalog reflects the continuous curation of our broader platform content; we select for the most engaging, relevant, and high-quality courses that best fit the requirements of organizations. Our rigorous curation process considers factors such as learner feedback and ratings, topic relevance, content quality, and instructor engagement.

Our business has experienced rapid growth. From 2019 to 2020, our revenue grew 55.6% to $429.9 million, which includes over 100% growth in UB revenue, although we incurred net losses of $69.7 million and $77.6 million during 2019 and 2020, respectively. As of December 31, 2020, we had an accumulated deficit of $378.5 million,.

Industry

As technological advancements, new fields of study, and novel industries render existing skill sets obsolete, individuals and organizations alike struggle to keep their expertise up to date. Yet continuous proficiency in the latest technologies has become a prerequisite in many fields. The need for a new model for learning and sharing skills is urgent. According to the World Economic Forum, companies surveyed estimate that around 40% of workers will require short-cycle reskilling (i.e., six months or less), and 94% of business leaders report that they expect employees to pick up new skills on the job.

 

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The COVID-19 pandemic has further accelerated the need for skills training. According to a report by the World Economic Forum, 84% of employers surveyed report that the COVID-19 pandemic has increased the need to digitize. Adapting employees’ skills and roles to the post-pandemic ways of working is crucial to building operating-model resilience. The shift to online learning has been ongoing for years, and we expect this shift to continue to accelerate.

Unfortunately, many of today’s options have a number of shortcomings:

 

   

Relevance: Traditional learning solutions rely on the so-called publisher model, which involves a lengthy, centralized, and expensive “top-down” development process by multiple levels of editors and reviewers. We believe a top-down publisher model disincentivizes continuous course creation or improvement post-publication because it limits the speed of course development, instructors’ creative oversight over their content, and the cost-effectiveness of localized content production. Yet the importance of timely access to relevant skills training will only increase. According to the World Economic Forum, 97 million new roles may emerge by 2025.

 

   

Breadth: Due to the slower speed and higher costs associated with the publisher model, existing solutions tend to limit content to the most popular learning areas such as technical skills, creative skills, or personal development strategies. As a result, these training options may lack the content breadth, within topics and between topics, and the instructor diversity to meet the interdisciplinary objectives of modern learners. Existing solutions may not adequately address continuous and multidisciplinary learning needs.

 

   

Quality: While large volumes of digital learning content exist globally, the quality of this content can be difficult to ascertain. Often traditional providers do not provide quality indicators such as ratings, reviews, and past performance. The modern learner needs an efficient way to access high-quality content.

 

   

Scalability: Existing solutions have proven ineffective at operating on a global scale. Many rely primarily on in-person training, which is difficult to reproduce at scale and fundamentally limited by an instructor’s time and physical resources. Existing solutions have also been slow to leverage technology to expand their reach. Other digital solutions, despite being more scalable than in-person training, have also struggled to provide local content for international communities.

 

   

Affordability: The high cost of learning solutions prevents many individual learners from advancing or upgrading their skills. Likewise, pricing for existing solutions is often standardized globally, further limiting access in many geographies.

We offer a new approach, one that addresses these shortcomings and effectively connects the global ecosystem of learners to up-to-date knowledge from experts and practitioners around the world. We are creating a better learning experience.

Our market opportunity

According to a HolonIQ study, the global online and offline education market was $2.6 trillion across higher education, corporate training, and online learning in 2019. Before the COVID-19 pandemic, the majority of corporate training occurred offline, and we believe that online education is well placed to address the scalability and affordability limitations of offline education. With the increase of internet connectivity, technological advances, and interactive tools at a low cost, we expect a massive shift from offline to online.

Based on data from Arizton, we estimate our market opportunity in online learning to be $223 billion. We calculate this estimate by aggregating the global corporate opportunity of $71 billion and the global consumer opportunity of $152 billion in 2021. We believe that our market opportunity could grow to be multiples of today’s estimate as learning continues to transition online.

Further, we believe that online education can address the rising demand for lifelong learning in the rapidly evolving world economy, a development that would expand our market opportunity to include the majority of the global adult population.

 

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Our solution: the world’s learning platform

Our platform allows individual learners and organizations all over the world to access affordable, relevant, and up-to-date content from experts and experienced practitioners in nearly every field. We combine this high-quality content with data insights and technology to create a platform purpose-built to meet the specific needs of learners, instructors, and organizations.

In effect, our platform delivers a powerful flywheel of content creation, engagement, and continuous content optimization. Our expert instructors continuously generate new courses and update existing ones, while our marketplace encourages engagement on the most in-demand topics. The volume and frequency of these interactions allow us to generate meaningful insights and provide real-time feedback and analytics for our instructors. These data insights in turn improve content quality, enhance course personalization, and optimize productivity and satisfaction for our learners.

LOGO

 

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One way that we foster access to courses for individual learners and organizations is through broad content distribution across our various channels. We leverage machine learning, or ML, to increase learner retention and conversion using enhanced personalization. At the same time, we believe our model encourages more relevant and engaging content through well-aligned incentives for our instructors, supported by consistent improvement from the feedback and data collected from individual learners and UB customers.

 

LOGO

Individual learners have access to thousands of free courses on our platform. Free course enrollments represent an important source of customer acquisition, with millions of learners enrolling each year in these courses. Once learners interact with our platform, we make discovering courses of interest easier through the use of ML. Powered by supply-and-demand dynamics within our marketplace, our ML algorithms consider multiple course attributes such as topic, quality, instructor rating, number of enrollments, and learner’s country of origin. The algorithms surface both free and paid courses and help improve enrollment rates overall.

We also offer unlimited access to a curated catalog of courses through our Consumer, Enterprise and Team plan subscriptions. The courses selected for the subscription offerings are among the highest quality, most relevant, and most popular on our platform. Pricing for our subscription plans typically begins at a range of $20-$30 per seat per month, subject to geographic variations.

Our Consumer plans are offered on a monthly basis and provide a single seat with access to a catalog of over 5,000 of our top-rated courses. Pricing for Consumer plans varies based on jurisdiction and the course catalog for which the learner has subscribed. Our Consumer plans generally renew automatically for subsequent subscription terms. Learners can cancel to prevent renewal at the end of the then-current period.

Our Team plan offers organizations access to 5,500 top-rated courses for 5-20 seats at an annual rate starting at $360 per seat. Our Team plan offers an automatic renewal option for subsequent subscription terms. These customers can cancel to prevent renewal at the end of the then-current period. Team plan accounts can be customized to provide a unique, enterprise-specific URL and can incorporate the UB customer’s logo in the user interface. Our Team plan also permits learners to access the applicable course catalog through our UB app and provides enterprises with basic learner management tools.

The Enterprise plan begins with the same offering as the Team plan for 21+ seats and supplements it with additional administrative tools, insights, learning playbooks, and additional courses through our language packages. Pricing for our Enterprise plans is based on volume, length of contract, and a number of other factors. Enterprise plans are available as both annual and multi-year subscriptions, with renewal and cancellation terms

 

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varying based on each customer’s specific contract. In addition to these subscriptions, we offer immersive learning experiences such as labs, skills assessments, and coding exercises in a range of verticals.

What we offer our learners

We provide over 39 million learners with relevant, affordable, and high-quality content, and we do this on a platform that enables the constant improvement of our courses by leveraging the social validation of over 486 million course enrollments, as well as thousands of ratings and reviews. With Udemy, learners can fulfill objectives involving:

 

   

Technical skills: Learners often seek to gain proficiency in the latest technology, which helps them stay competitive through upskilling or reskilling of their capabilities.

 

   

Business skills: Business and professional soft skills, such as negotiation strategy or team leadership, are in constant demand as individuals look to advance their careers, react to new workplace environments, or take on new responsibilities.

 

   

Personal development: Learners like to complement their primary skills with discovery of new interests or hobbies such as music, drawing, and wellness.

Learners on Udemy receive a comprehensive and immersive experience through interactive exercises and the ability to communicate directly with instructors through question-and-answer functionality. Our courses feature world-class instructors like Angela Yu, founder of the programming bootcamp London App Brewery, whose courses have 1,059,476 total enrollments and an average rating of 4.7/5, and Jose Portilla, the Head of Data Science of Pierian Data, whose courses have 3,316,084 total enrollments and an average rating of 4.5/5.

We work to create a trusted and welcoming platform for learners by implementing policies and procedures intended to encourage respectful behavior. This includes requiring instructors to respect the intellectual property rights of others and prohibiting the posting of any inappropriate, offensive, false, or infringing content. As part of our publication process, we use mechanisms to help review the technical quality of courses and we reject courses on topics prohibited on our platform. Additionally, Udemy enables learners and other parties to easily report content that violates our policies, and we have processes to take action when we become aware of policy violations, including removal of content and termination of accounts.

Our refund policy for courses purchased on our consumer marketplace offers learners the ability to request a cash or credit refund up to 30 days from their purchase, subject to certain refund policy guidelines. The decision to refund in either cash or credit is at our sole discretion.

What we offer our UB customers

We have over 7,000 global UB customers, including 41 of the Fortune 100.

We are focused on helping UB customers upskill and reskill their teams to increase productivity, inspire innovation, address digital transformation, and drive talent retention, particularly in a post-COVID-19 world. UB customers typically express high satisfaction with their UB experience, resulting in our average net promoter score of 49.

Our content is relevant to organizations across a variety of industries and includes courses in subjects like technology and business skills. Our curated UB offering begins with 5,500 of the most engaging and relevant courses available on our platform, selected to meet the needs and standards of some of the world’s largest enterprises. As a part of this offering, we also offer an extensive non-English language collection, which includes courses in Spanish, Portuguese, German, Japanese, and French. We have continued to expand our course offering within UB with the launch of Arabic, Indonesian, Italian, Mandarin, and Turkish language packages in 2021, and we plan to launch Korean, Polish and Russian language packages later in the year.

 

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We use a rigorous selection process across a wide set of criteria to determine the courses that will be offered as part of UB, including:

 

   

User behavior: Learner feedback and ratings, as well as content searches, help us determine which courses to maintain or add to UB.

 

   

Customer input: Specific content requests, prospects’ requests for proposal, and customer success stories are evaluated to identify new areas of focus that help ensure the continued strong relevance of our offering.

 

   

Market research: Industry trends and instructor interviews help us determine relevant topics and new technologies valued by enterprises and their employees.

 

   

Competitor analysis: We monitor market data and analyst reports on an ongoing basis to stay at the forefront of market demand and quickly address any applicable gaps within the topics offered.

We constantly update and enhance the curated list of courses included in the UB course catalog in response to industry changes and technological advancement. As of December 31, 2020, the UB course catalog included over 32,000 hours of technical content and over 10,000 hours of business and professional skills content. On average, over 130 new courses are added each month. Our overall UB course catalog has increased from fewer than 2,500 courses in 2017 to over 8,000 today.

In addition to high-quality content, we provide the tools and insights necessary for enterprise administrators, managers, and teams to create learning paths. These learning paths allow organizations to assemble customized learning series made up of Udemy courses, the organization’s own material, and links to external resources. Learning paths are only visible within the organization that creates them, and offer a unique benefit to administrators and employees. As of December 31, 2020, our UB customers have generated over 210,000 learning paths.

We also offer UB customers a comprehensive analytics dashboard and other powerful tools through which they gain high visibility into the progress, areas of focus, and feedback of their employees. This strong set of tools, which includes our learning playbooks, helps our UB customers better understand and optimize learning experiences for their employees and ensure they are delivering a strong and measurable return on their investment in learning skills.

What we offer our instructors

We offer instructors from around the world access to a global audience of over 39 million learners. Our model allows instructors who elect to charge for courses to share directly in the economic upside of the course content they contribute and the growth of our platform. We have an aligned incentive model where payments to instructors are proportional to course sales on our platform. In 2020, our paid instructors earned $161.4 million from Udemy for their courses, with average paid instructor earnings of $2,950 and over 9,000 global instructors earning more than $1,000. The breadth of instructors and courses contributes to the wide variety of content topics available on our platform, as well as meaningful depth within most content categories. We believe that this combination of breadth and depth helps foster competition and choice on our platform and attracts learners and enterprise customers.

We enable our instructors to drive innovation and ongoing engagement on our platform. We not only provide instructors access to millions of learners but also offer proprietary tools to help them generate more relevant and better content. Instructors are able to use platform insights, review feedback from learners, and harness analytics dashboards to manage their course content, brand, and course marketing. As instructors upgrade their courses, our performance marketing engine identifies and selects the best courses to be featured to each learner around the world. Our marketing engine targets and reaches millions of learners, many more times what instructors would be able to reach on their own. In addition, we offer instructors insight on the revenue opportunity and existing content for any given topic, and we provide auto-generated, translated captions from English to Spanish, Portuguese, French, German, Italian, and Polish, so instructors can better reach our global learner base.

 

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When an instructor’s course is added to the UB catalog, instructors are subject to an exclusivity clause for the use of their content on our platform, pursuant to which instructors agree, subject to limited exceptions, not to offer any on-demand content, such as pre-recorded courses, on any competing platform in a way that directly competes with or impairs the sales of such content on our platform. This exclusivity clause is effective for so long as an instructor’s content is included in the UB catalog, and we may continue to include content in the UB catalog for up to 12 months after an instructor elects to opt out of the UB catalog. We believe these exclusivity arrangements increase the value of our offerings by increasing the amount of unique content on Udemy and helping maintain our robust roster of expert instructors.

We believe that, on average, the value we offer instructors ultimately delivers a far higher return on investment relative to other content creation and online learning competitors.

Our competitive strengths

We believe our business model benefits from several competitive advantages:

Global distribution and reach with strong brand value: We consider our platform to be naturally borderless as it connects individual learners and enterprise customers with instructors across the world. This has enabled us to develop a global distribution platform targeting all of the constituents in the learning ecosystem.

In 2020, 61% of our revenue was generated outside of North America. Because our online platform is available globally, curious learners and organizations can easily test our content. As these new learners and organizations begin to engage with us, we then have the opportunity to quickly and efficiently expand into these new markets by focusing our marketing, advertising, pricing, and language customization resources and expanding our payment options, which in turn allows us to grow our base of individual learners and enterprises on an ongoing basis and attract new instructors who create native language courses. We believe the scale of our platform and the increasing recognition of our brand create further avenues of growth.

Robust content generation engine:

 

   

Premium quality: We have effectively built a creator platform that allows instructors to develop content on virtually any topic, while having the flexibility to update courses as they incorporate feedback from millions of learners around the world. We believe this continuously updated content, along with personalized recommendations and advanced search capabilities, presents a better value proposition for learners who benefit from accessing the most up-to-date, high-quality content that is relevant to them. The constant feedback loop between learners and instructors ensures that we are able to maintain the high quality of our overall offering.

 

   

Relevance and speed to market: Our marketplace model motivates instructors to provide relevant content to learners quickly, whether by being first to address in-demand topics, refreshing existing topics, or finding new and better ways to serve the learner community on existing topics. Instructors who do so are more likely to have a “first-mover” advantage in attracting learners and enrollments to their courses, which in turn increases the likelihood of their course content being featured by our ML algorithms or included in our UB offerings, which also drives more enrollments and engagement from learners. We believe these structural inducements, coupled with our aligned incentive model, help drive our instructors to update their courses at a much higher rate than courses offered through competitors with a traditional publisher model. For example, 60% of courses in the UB course catalog were updated in 2020.

 

   

Breadth of content: We provide access to over 158,000 courses (14,820 of which are offered for free), including over 56,000 courses in languages other than English. Many of our competitors specialize in a specific category, which proves to be a suboptimal solution for companies and their employees that require a blend of technical, business, and soft skills. We also offer a broad set of personal enrichment courses in the Wellness, Music, and Lifestyle categories, among others. On average, instructors publish more than 5,000 courses a month on the Udemy platform.

 

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Affordability: Our ML pricing algorithms constantly analyze supply and demand for each content category, topic, and course on our platform to help us determine an optimal price on a per-country basis. This helps us understand individual learner willingness to pay, optimize overall pricing, and adjust prices when necessary to maximize overall revenue while maintaining competitive pricing.

Self-reinforcing flywheel with powerful network effects: We are one symbiotic, data-centric platform with over 1.2 billion unique visitors to date. We believe the growing number of individual learners and enterprises on our platform attracts instructors for whom our platform and global audience can create new income streams and help support their families and local communities. The increasing number of relevant, high-quality, and up-to-date courses offered by world-class subject matter experts and industry practitioners, in turn, attracts more individual learners and enterprises.

Our direct-to-consumer offering is synergistic with UB. As individual learners experience firsthand the quality and benefits of Udemy’s platform, they realize the impact it could have on their teams and organizations, thus becoming evangelists for Udemy within their organizations at all levels. We have been very successful at driving high-converting leads to UB, with over half of leads coming from our direct-to-consumer platform in 2020.

Powerful data insights and analytics: With over 1.2 billion unique visitors, more than 486 million course enrollments, and in 2020 alone, almost 11 billion minutes of learning, we believe that the volume of the data our platform collects provides meaningful insights into the behaviors and needs of our learners and instructors. We leverage that data to provide personalization for learners as well as to promote high-quality and relevant content from instructors.

We capture user behavioral data and focus on understanding the learning objectives and interests of our learners across multiple touchpoints during their learning journey to better address their needs and recommend the right courses. We also analyze enrollment data, market insights, and feedback from learners to identify needed skills or new topics of focus within our content catalog. We share this information with our instructors in real time so they can improve their course offerings.

Flexible technology platform: Our technology platform is modern, agile, accessible from a variety of online and mobile channels, and built to scale with our global growth. A deep reservoir of data helps our data scientists recommend better and more relevant content. We use advanced technology applications, such as personalized promotions, lifecycle marketing, and content personalization to help tailor our platform for our learners.

Our platform’s ability to provide a personalized experience is further enhanced by the ML methodologies used to develop the algorithms included in our technology, which allow us to continuously and automatically personalize each learner’s experience. We regularly run tests to determine which product features, course recommendations, prices, and messaging will drive the best outcomes for our learners and Udemy as a whole. In addition, we have built our technology to be flexible to enable us to continuously test and add new features, such as interactive exercises and immersive learning experiences.

Our growth strategies

We are still in the early stages of our long-term growth strategy. We expect to continue expanding our consumer and UB customer base, instructor network, and content catalog while increasing our market opportunities through the following strategies:

Accelerate the growth of our enterprise business through:

 

   

Successfully executing on our land-and-expand strategy. Our strategy focuses on acquiring new customers and efficiently growing our relationships with existing customers, beginning with either individual users or departmental deployments. Historically, we have expanded from individual to department to multi-department to enterprise-wide sales as UB’s value is proven and enterprise customers identify additional

 

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use cases. With fewer than 10% of total available seats contracted in our enterprise customer base, we consequently see a large opportunity for growth. We intend to continue to expand our sales team footprint globally and to improve our upselling tactics with the assistance of better tools and systems. In addition to inbound leads from our direct-to-consumer offering, we have developed a strong outbound lead-generation process with highly effective account-based marketing operations, allowing us to target, develop, and nurture key accounts in large organizations.

 

   

Improving quality and relevance of our courses. We curate our enterprise catalog by selecting the highest-rated and most engaging courses from our consumer business. We intend to continue leveraging our large platform to source high-quality and relevant curricula. We will also continue to improve the speed and efficiency of our curation processes, enabling us to quickly discern the content most relevant to our enterprise customers.

 

   

Integrating our UB offering with employees’ workflow. We provide easy-to-implement learning playbooks, which enable customers to combine UB courses with their own in-house training to create blended learning programs. UB learners can also take advantage of our personalized content recommendations, which we derive from the data we collect. We currently integrate with existing employee learning-and-development and HR workflows, including our customers’ learning management systems and learning experience platforms, to help enable a more robust offering for UB learners and greater employer visibility into learning. Examples of these integrations include Workday, SAP SuccessFactors, Slack, and ServiceNow. Integrations enable UB customers to incorporate learning in the flow of work: learners can discover, search, and consume our UB catalog. Leaders can sync, track, and report learning progress for employees across other HR systems and also encourage learning across the organization through reminders and sharing on existing company messaging platforms. Looking forward, we intend to expand our offering to integrate with additional employee learning-and-development and HR workflows, and to introduce additional services for employees, thus expanding usage within our UB customers.

 

   

Deliver immersive learning experiences. Our platform currently offers powerful learning experiences including practice tests, coding exercises, and quizzes, which permit learners to prepare for certification exams and better retain what they have learned. We intend to expand our offerings to include deeper skills assessments, labs, and cohort-based learning. Assessments increase learning efficiency by identifying further areas of study for learners. Labs enable learners to practice the skills they are learning in the applicable technical environments. Cohort-based learning combines synchronous and asynchronous learning together with reflections and virtual classroom time, enabling learning from one’s peers and creating accountability to the cohort for course completion and live participation. We will also consider acquisitions to expand the immersive learning experiences we offer, with a goal of improving learner outcomes and ultimately increasing retention.

Increase learner retention through:

 

   

Building a global personalization engine. Since the beginning of 2020, we have invested considerable resources in developing a personalization-based technology platform, which includes:

 

  -  

State-of-the-art eventing platform to track and store every learner interaction with our site and apps;

 

  -  

Customer data platform to structure and analyze all of our learner data;

 

  -  

Lifecycle marketing platform to develop, train, and operationalize personalization algorithms; and

 

  -  

Campaign management platform to link personalization algorithms with customer-facing touch-points such as website placements, emails, and push notifications among others.

Our personalization efforts are only beginning. We believe that these investments will yield high returns around customer engagement, retention, and lifetime value in the years to come.

 

   

Expanding our subscription offering. In early 2021, we launched a direct-to-consumer subscription in beta testing. In its initial format, the subscription offering is similar to our Team plan offering focused on

 

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professional skills. Our objective is to provide consumers ongoing access to the platform’s best content for a monthly fee. We believe there is broad demand for learning subscriptions, and we are uniquely positioned to provide a compelling and highly competitive product. We plan to test and launch additional forms of subscriptions including bootcamp-style courses with assessments and labs to help learners reach new levels of proficiency. We believe that consumer subscriptions, in the absence of employer-sponsored access, will increase the retention of individual learners who seek to continuously acquire new skills and value greater ongoing access to content. Offering different subscription packages based on area of expertise or added features, for example, will allow us to capture different types of individual learners at different price points, all while increasing their engagement with Udemy.

Expand our geographic footprint through:

 

   

Organic expansion. All of our courses are discoverable everywhere in the world. We enter new countries via courses taught in English, as they appeal to a broad audience globally. As the platform grows in popularity through organic levers such as word of mouth or search engine optimization, local instructors create courses in their native languages, increasing Udemy’s appeal to learners fluent in those languages. In 2020, we offered over 56,000 courses in languages other than English. We will continue to invest in our technology and our brand to drive search engine optimization and word of mouth in order to continue the organic growth.

 

   

Executing our international playbook. As the content catalog expands in each country, we start investing in additional growth levers such as local payment methods, local currency pricing, and local marketing. These investments drive higher traffic, enrollments, revenue, and leads for UB. Once we reach a steady volume of leads to UB, we build in-country go-to-market sales teams to grow and expand our UB customer base. We also may partner with local companies that have an interest in growing the adult learning market in their countries. We have executed our international playbook in a number of countries, including Brazil, India, and Japan, and we are in the process of similar investments in Indonesia, Mexico, South Africa, and other key geographic markets. Our international playbook will continue to allow us to build a targeted list of countries in which we anticipate we will expand with a high likelihood of success.

Competition

The market for developing skills is rapidly growing and highly competitive. We compete for individual learners, enterprise customers, and instructors on the following basis:

 

   

Learners: We compete for learners based on our course catalog, instructors, and learning tools. We believe that we are positioned favorably because of our ability to attract instructors and support them with data and insights to create and refresh high-quality content.

 

   

Udemy Business customers: We compete for customers based on our up-to-date content, the breadth and depth of that content across the full range of core business functions, and advanced product features that optimize self-paced learning and enable organizations to effectively drive programmatic learning. We believe that we are positioned favorably because of the synergies between our consumer and UB businesses, and the strategic partnerships we form with our UB customers that help them drive engagement in their learning programs and, in turn, business outcomes like employee retention and corporate productivity.

 

   

Instructors: We compete for instructors based on our ability to provide monetization opportunities. We believe that we are positioned favorably because of our ability to attract learners across the globe, provide data and insights to help instructors to retain learners, and offer an attractive shared revenue model.

We believe the competitive landscape is not well-suited to address the growing need for people to develop skills that are continuously and rapidly evolving. The traditional publisher model can be slow moving and reactive. Other niche marketplace models cannot serve the learner of today who is focused on developing both the hard and soft

 

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skills. We expect to gain market share as our marketplace platform offers the breadth of skills needed by learners and organizations. Competition can include:

 

   

Corporate training offerings, such as those from Pluralsight, LinkedIn Learning, and Skillsoft

 

   

Direct-to-consumer training offerings, such as those from Coursera and edX

 

   

Specialized content training offerings, such as those from A Cloud Guru and Skillshare

 

   

Online free resources used to gather and share knowledge and skills

We believe our business model offers the following advantages over these competitors:

 

   

Our marketplace model that has created a vibrant ecosystem of individual learners, enterprises, and instructors

 

   

Our learner base of over 39 million individuals

 

   

Our network of over 56,000 instructors, many of whom are expert practitioners in their fields

 

   

Our data and analytics platform that continuously improves as we scale

 

   

Our ability to provide individual learners with relevant content based on their interests and objectives, with over 158,000 courses covering a broad array of subjects in local languages

 

   

Our global presence and brand recognition

Sales and Marketing

Consumers

Our direct-to-consumer marketing strategy focuses on brand and performance marketing, strategic partnerships, and lifecycle monetization. Brand marketing increases awareness while performance marketing drives incremental traffic among potential learners. The strength of our community and brand drives significant organic acquisition, with the majority of our customers coming from unpaid channels. Our strategic partnerships aim to increase reach by making Udemy courses discoverable on third-party websites and mobile apps. Finally, lifecycle marketing and monetization focuses on building personalization at scale, increasing learner retention and long-term value, optimizing prices and promotions, and testing new monetization models.

Udemy Business

Our consumer ecosystem helps drive UB marketing efficiency and provides leads for prospective UB customers. As we expand to new regions and countries, we first market to organizations to generate brand awareness and interest in our UB offering, and then our sales team identifies and engages with potential customers.

We sell to our UB customers both directly, through our sales teams, and indirectly, through third-party channels. Once an organization signs on, our customer success team partners closely with that organization to track progress toward business outcomes and determine opportunities for expanding usage.

Instructors

Global experts learn about Udemy in a variety of ways including awareness campaigns and by coming to the platform as learners. Once onboard, our platform provides instructors with insights into learner demand and financial opportunity, incentivizing them to create new course content. Our Instructor Partnership team works closely with our top instructors to share plans and develop new products and services.

Technology and research and development

Our technology consists of a global distribution platform designed to support all parties in the learning ecosystem. It features a modern architecture designed to support our continued growth at scale. Our goal is to provide world-class experiences across most screens and devices.

 

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We have a cross-functional, agile team of data scientists, ML engineers, software engineers, and product managers focused on continuously improving our platform to address evolving customer needs. Thus far, the team has built algorithmic and model-driven solutions at scale to provide the following capabilities: personalized and differentiated experiences for all learners, comprehensive instructor tools for content delivery and student engagement, and insights dashboards for enterprises to track employee training progress.

We have built a closed-loop user journey on top of a robust, enterprise-grade technology platform. Through data collection over time, we are able to continue perfecting our learner personalization. Personalized learner experiences begin with offering the correct product and pricing to users through marketing, multi-offering communications, and customer data platforms. Using ML-based tools, we then drive a highly personalized user experience for our learners that includes optimizing the offering, time, and frequency of each communication, recommending relevant content based on learner objectives and preferences, and offering tailored promotions to drive retention and engagement. We also capture learner interest, goals, and searches at different times during the user journey so we can provide the best possible recommendations for courses and learning paths.

We continuously gather market research and leverage user data to optimize the content available on our platform. Through our deep understanding of learner needs, we aim to deliver the right learning content, packaged the right way, and offered at the right time. The data gathered also provides powerful insight tools and feedback to our instructors so they can improve their courses and ultimately preserve the high quality of our overall offering.

Human capital resources

We believe we have a world-class culture with a highly engaged global employee base. We have achieved 4.5 of 5.0 stars on Glassdoor, a platform which represents voluntary reviews among current and former employees, as of June 30, 2021. Additionally, our company has been recognized as a Bay Area Best Place to Work by San Francisco Business Times and as a #1 employer in Turkey on the Great Place to Work lists for three years in a row. As reflected in our annual employee survey, our employee engagement score is 83%, which is 12% above benchmark for companies at our size and stage.

We are proud of our internal focus on learning and development and leverage the UB platform to drive upskilling and career growth within our organization. “Always Learning” is a key value for our company. We hold monthly “Drop Everything and Learn” hours to provide employees with dedicated time they can use to learn professional or personal skills offered on our platform. We also use UB to provide our team with access to a wide range of content, from important all-company meetings to a variety of management training courses developed by our own Learning & Development team.

Our mission-driven approach to make knowledge opportunities accessible to learners around the world helps drive recruitment to our team. Udemy is the only digital learning company included in the Fortune 2020 Change the World list, and our employees enjoy the opportunity to be a part of a socially conscious brand benefiting all constituents. Overall, we are a leader in gender diversity among companies like ours, with 42% of our global workforce, 31% of our senior leadership, and 28% of our technical workforce identifying as women as of December 31, 2020.

As of December 31, 2020, we had 888 full-time employees. None of our employees are represented by unions. We consider the relationship with our employees to be strong and have not experienced interruptions of operations due to labor disagreements.

Our environmental, social, and governance efforts

As a mission-driven company, we strive to create a positive social and economic impact, balancing the needs of our learners, instructors, customers, employees, investors, and the environment. We enable anyone from anywhere in the world to create a course and to market it to consumer and enterprise learners. Our platform helps novices learn from experienced practitioners. Access and inclusion are at the very core of our business model.

 

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We believe that providing access to learning at scale supports the United Nations Sustainable Development Goals, or SDGs, including:

 

   

Goal 4 Lifelong Learning: We provide inclusive and equitable quality training and promote lifelong learning opportunities for all. Over 39 million cumulative learners consumed almost 11 billion minutes of easy-to-access quality learning on our platform during 2020.

 

   

Goal 8 – Decent Work and Economic Growth: During 2020, our paid instructors earned $161.4 million for their courses, with average paid instructor earnings of $2,950 and over 9,000 global instructors receiving more than $1,000 in earnings. We enable individuals from around the world to create new income streams and support their families and local communities.

 

   

Goal 10 – Reduced Inequalities: Any individual can be an instructor on our platform regardless of formal academic qualifications. Our platform eliminates barriers to teaching and enables practitioners to spread their knowledge globally. Learners tap our platform for affordable upskilling that unlock career opportunities regardless of prior formal education and geography. Essentially anyone can use our platform and learn. We offer 14,820 free courses and our instructors distribute millions of instructor coupons globally to encourage individuals to try their courses for free. In 2020, 82.5% of consumer learner course enrollments on our platform were free.

Beyond these United Nations SDGs, we reference the Sustainability Accounting Standards Board, or the SASB, in our impact reporting. An independent institution, the SASB provides a globally recognized framework for sustainability reporting across companies and industries.

Recognizing the growing importance of fact-based, actionable assessments of environmental, social, and governance risks and opportunities across business operations, we engaged Sustainalytics, a Morningstar company and an independent provider of ESG and corporate governance ratings, research, and analysis, to develop an ESG risk rating report.

Our ESG goals and policies

We are committed to pursuing sustainable business practices and have implemented ESG policies and goals throughout our company to fulfill this commitment.

Environmental: We actively manage the environmental footprint of our operations. We use both hosted data centers and cloud computing providers for our operations. In our hosted data center environments, we use equipment that meets energy efficiency standards set forth by the American Society of Heating, Refrigerating and Air-Conditioning Engineers and by the Electronic Product Environmental Assessment Tool. Our cloud computing provider intends to power its operations with 100% renewable energy by 2025. We prioritize selection of highly rated Leadership in Energy and Environmental Design or comparable standards design in leasing office space.

Social: Our business impacts society through our relationships with our varied stakeholders, but it starts with our employees. We believe in the importance of fostering a diverse, inclusive, and safe workplace, recognizing that through diversity and inclusiveness we gain a variety of perspectives, views, and ideas that strengthen our ability to strategize, communicate, and deliver on our mission. Overall, as of December 31, 2020, 42% of our global workforce, 31% of our senior leadership, and 28% of our technical workforce identified as women. We established a board of directors that values diversity and representative governance. We are committed to increasing diversity and representation through our diversity, inclusion, equity, and belonging initiatives, and to disclosing our diversity statistics on an annual basis.

We believe that building a better business means engaging with the communities in which we work and invest. We encourage and support community engagement. Our community program uses a global-and-local approach and is driven by the community involvement teams in many of our offices. Projects are organized locally and partner with various service organizations within our communities dedicated to causes encompassing public

 

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service, learning, environmental efforts, healthcare, and military veterans. We established a formalized charitable giving program with an employee matching component that contributed to over 50 charities since its inception.

The Udemy Free Resource Center drove more than 4.5 million enrollments to over 570 free courses designed to enable learners to acquire the skills they need to navigate the COVID-19 pandemic.

Governance: We created a governance structure to promote responsibility and accountability for ESG matters across our company. Our single-class capital structure adheres to best practices in corporate governance. The corporate governance and nominating committee of the board of directors will oversee ESG matters pursuant to its charter. For more information, see “Management—Board committees—Corporate governance and nominating committee.” Prior to the completion of this offering, we will establish an employee-led ESG committee, with participation from executive management and senior members of our operations, finance, marketing, people, and legal teams. Our ESG committee will meet quarterly and report to executive management and to the board of directors.

Data security and privacy are critically important to our operations. We have implemented extensive security practices designed to ensure appropriate physical, technical, and administrative safeguards to protect customer and employee data. This program includes a data registry and a data map of the systems where customer information is stored, and consumer-facing privacy policies that describe our data and privacy practices. The audit committee of the board of directors will oversee cybersecurity matters pursuant to its charter. For more information, see “Management—Board committees—Audit committee.”

Properties

Our corporate headquarters, consisting of approximately 59,000 square feet of office space in San Francisco, California, is leased through 2024, with an option to extend until 2029. We also lease additional office space in locations around the world, including Mountain View, California; Denver, Colorado; Ankara, Turkey; and Dublin, Ireland. We believe that our facilities are suitable to meet our current needs. We also anticipate that suitable additional or alternative space will be available at commercially reasonable terms for future expansion.

Legal proceedings

From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of business, as well as governmental and other regulatory investigations and proceedings. In addition, third parties may from time to time assert claims against us in the form of letters and other communications. We are not currently a party to any legal proceedings that, if determined adversely to us, would, in our opinion, have a material adverse effect on our business, financial condition, results of operations, or cash flows. Future litigation may be necessary to defend ourselves and our business partners and to determine the scope, enforceability, and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

 

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Management

Executive officers and directors

The following table sets forth the names and positions of our executive officers and directors and their ages as of May 25, 2021:

 

Name    Age      Position
Executive officers:      

Gregg Coccari

     68      President, Chief Executive Officer and Chairperson of the Board of Directors

Sarah Blanchard

     45      Chief Financial Officer

Velayudhan (Venu) Venugopal

     61      Chief Technology Officer

Gregory Brown

     52      President, Udemy for Business

Cara Brennan Allamano

     43      Senior Vice President, People, Places and Learning

Llibert Argerich

     41      Senior Vice President, Marketing

Prasad Gune

     53      Senior Vice President, Product
Non-employee directors:      

Eren Bali

     36      Director

Parker Barrile

     39      Director

Kenneth Fox

     50      Director

Heather Hiles

     52      Director

Lawrence Illg

     50      Director

Jeffrey Lieberman

     47      Director

Lydia Paterson

     48      Director

 

(1)

Member of the audit committee

 

(2)

Member of the compensation committee

 

(3)

Member of the corporate governance and nominating committee

Executive officers

Gregg Coccari has served as our President and Chief Executive Officer and as a member of our board of directors since February 2019, and as our Chairperson of the Board of Directors since May 2021. From November 2015 to March 2017, Mr. Coccari served as Chief Executive Officer of Stella & Chewy’s, a pet food company specializing in raw, natural pet foods, before pursuing non-professional interests from April 2017 to January 2019. Before Stella & Chewy’s, Mr. Coccari served as President and Chief Executive Officer of Futuredontics, a provider of dental marketing services and software, from 2010 to 2012, as President and Chief Executive Officer of NetQuote, an online insurance quote marketplace, from 2006 to 2009, and as President and Chief Executive Officer of Teleflora, an online flower delivery network, from 1992 to 2004. Mr. Coccari received a B.S. in psychology from Colgate University and an M.B.A. from the Wharton School of the University of Pennsylvania.

We believe that Mr. Coccari is qualified to serve as a member of our board of directors because of the perspective and experience he brings as our President and Chief Executive Officer.

Sarah Blanchard has served as our Chief Financial Officer since April 2021. Prior to joining Udemy, Ms. Blanchard served as Chief Financial Officer and Chief Operating Officer of Omada Health, a digital healthcare platform focused on sustainable lifestyle changes, from March 2019 to April 2021, and as Omada Health’s Chief Financial Officer from August 2014 to March 2019. Ms. Blanchard previously served as Chief Financial Officer of CoreOS, a developer of Kubernetes and container-native software solutions, from October 2017 until CoreOS’s acquisition by Red Hat in January 2018. Before that, Ms. Blanchard served as Vice President, Finance of Silver Spring Networks, a smart grid products provider, from 2009 to 2014. Ms. Blanchard received a B.A. in accounting from Michigan State University and an M.B.A from the Wharton School of the University of Pennsylvania.

Venu Venugopal has served as our Chief Technology Officer since May 2019. Before joining Udemy, Mr. Venugopal spent over six years at Vrbo.com, a division of Expedia Group, an online travel shopping

 

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company, where he held multiple roles from December 2012 to April 2019, including Vice President of Engineering from December 2015 to April 2019. Before that, Mr. Venugopal served in various engineering and product development roles at Adobe, a computer software company, from 2005 to 2011 and, prior to its acquisition by Adobe, at Macromedia, a graphics, multimedia and web development software company, from 2000 to 2005. Mr. Venugopal received a B.E. in mechanical engineering from Madras University, as well as an M.S. in computer science and an M.Eng. in mechanical engineering from the University of New Brunswick, Fredericton, Canada.

Gregory Brown has served as the President, Udemy for Business since December 2020. Prior to joining Udemy, Mr. Brown served as the Chief Executive Officer of Reflektive, a performance, engagement and analytics solution platform, from August 2019 until December 2020. Prior to Reflektive, Mr. Brown was the Senior Vice President of International Business at Blackhawk Network, a global payments provider, from August 2017 to August 2019. Before that, Mr. Brown served as Chief Revenue Officer for Achievers Solutions, a developer of cloud-based employee engagement software, from February 2013 to August 2017, and as Chief Revenue Officer for Extole, a developer of an online advocate marketing platform, from April 2011 to February 2013. Mr. Brown received a B.S. in business administration from California Polytechnic State University – San Luis Obispo.

Cara Brennan Allamano has served as our Senior Vice President, People, Places and Learning, since June 2018. Ms. Allamano also currently serves as a managing partner of PeopleTech Advisors, a consulting firm for HR technology companies that she founded in March 2013. Before joining Udemy, Ms. Allamano served as Senior Vice President, People + Places for Planet, a satellite imaging platform, from June 2014 to June 2018. Before serving as a consultant from 2013 to 2014, Ms. Allamano established the People team at Pinterest, a social media web and mobile application company, from 2012 to 2013. Ms. Allamano received a B.A. in English from the University of Kentucky and a master’s degree in human resources and organizational development from the University of San Francisco.

Llibert Argerich has served as our Senior Vice President, Marketing since August 2020 and previously served as our Vice President, Marketing from June 2018 to August 2020. Prior to joining Udemy, Mr. Argerich spent eight years at eBay, Inc., a multinational e-commerce platform, where he held multiple roles from 2010 until May 2018, including Global Director, Performance & Digital Marketing from January 2017 to May 2018 and Global Director, Social & Influencer Marketing from January 2015 to December 2016. Before that, Mr. Argerich served in various marketing roles at Expedia Group, an online travel shopping company, from August 2006 until June 2010. Mr. Argerich received a B.S. in economics and business from the Université des Sciences Sociales de Toulouse, Toulouse, France.

Prasad Gune has served as our Senior Vice President, Product, since December 2019. Before joining Udemy, Mr. Gune served as Senior Vice President, Product for Signifyd, an e-commerce fraud protection platform, from January 2019 to December 2019. Prior to that, Mr. Gune worked at OpenTable, an online restaurant-reservation service company, where he served as Senior Vice President, Product from October 2017 to June 2018 and Senior Vice President, Restaurant Product Management from May 2016 to September 2017. Before OpenTable, Mr. Gune worked in various leadership roles at LinkedIn, a professional networking company, Bain & Company, a management consultancy, Oracle, a database management company, and Siebel Systems, a customer relationship management software developer. Mr. Gune received a B.E. in mechanical engineering from the College of Engineering, Pune in Pune, India, an M.S. in mechanical engineering from the University of California, Berkeley, and an M.B.A. from Harvard Business School.

Non-employee directors

Eren Bali co-founded our company in January 2010 and has served as a member of our board of directors since then. Mr. Bali also served as our Chief Executive Officer from January 2010 to April 2014. Mr. Bali currently serves as Chief Executive Officer of Carbon Health, a technology-enabled healthcare provider, which he co-founded in October 2015. Mr. Bali serves on the boards of directors of various private companies. Mr. Bali received a B.S. in computer engineering and mathematics from Middle East Technical University, Ankara, Turkey.

We believe that Mr. Bali is qualified to serve on our board of directors because of the perspective and experience he brings as our co-founder and former Chief Executive Officer.

 

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Parker Barrile has served as a member of our board of directors since January 2021. Mr. Barrile is currently a partner for Norwest Venture Partners, a venture and growth equity investment firm, where he has worked since December 2016. Prior to that, Mr. Barrile served as Chief Product Officer for Prosper Marketplace, a peer-to-peer lending marketplace, from August 2015 to September 2016, and Vice President of Product at LinkedIn, a professional networking company, from September 2009 to August 2014. Mr. Barrile currently serves on the boards of directors of several private companies. Mr. Barrile received a B.S in mathematics and an M.B.A. from Stanford University.

Mr. Barrile was selected to serve on our board of directors because of his extensive experience in the venture capital industry, his business and leadership experience, and his knowledge of technology companies.

Kenneth Fox has served as a member of our board of directors since May 2015. Mr. Fox currently serves as a Managing Partner of Stripes, a growth equity firm which he founded in 2010. Prior to forming Stripes, Mr. Fox was a Managing Director and co-founder of Internet Capital Group, a venture capital firm. He was also the founder and Chairman of ICG Asia, a Hong Kong-listed joint venture with Hutchison-Whampoa that Hutchison later acquired. Mr. Fox currently serves on the boards of directors of Supernova Partners Acquisition Company, Supernova Partners Acquisition Co. II, Supernova Partners Acquisition Co. III, and several Stripes investments, including On-Running and Monday.com. Mr. Fox previously served on the board of directors of Blue Apron Holdings from 2014 to 2019 and Turtle Beach Corporation from 2014 to 2018. Mr. Fox received a B.S. in economics from The Pennsylvania State University.

We believe that Mr. Fox is qualified to serve on our board of directors because of his extensive experience in the venture capital industry, his business and leadership experience and his knowledge of technology companies.

Heather Hiles has served as a member of our board of directors since August 2020. Mx. Hiles currently serves as the managing partner of Black Ops Ventures, a seed-stage venture firm funding Black founders. Mx. Hiles previously served as the founding Chancellor and Chief Executive Officer of Calbright College, an online community college focused on preparation for jobs in the technology industry, from January 2019 to March 2020. Prior to that, Mx. Hiles was the Deputy Director of Postsecondary Success Solutions at the Bill & Melinda Gates Foundation, a nonprofit organization focused on fighting poverty, disease, and inequity around the world, from October 2016 to November 2017. Mx. Hiles previously served as Chief Executive Officer of Pathbrite, a digital portfolio platform used by colleges and universities, from their founding of Pathbrite in February 2012 until Pathbrite’s sale to Cengage Learning in November 2015. Before that, Mx. Hiles served as Chief Executive Officer of SFWorks, a nonprofit they founded that trained and placed people on welfare into living-wage jobs, from 1997 to 2001. Mx. Hiles currently serves on the boards of directors for several private companies, including Black Girls Code. Mx. Hiles received a B.A. in development studies and ethnic studies from the University of California, Berkeley and an M.B.A from Yale University.

We believe that Mx. Hiles is qualified to serve on our board of directors because of their extensive experience in the education and talent development industry, their business and leadership experience, financial expertise and their knowledge of technology companies.

Lawrence Illg has served as a member of our board of directors since May 2016. Mr. Illg has served as Chief Executive Officer, Food and EdTech, for Prosus, the international internet assets division of Naspers, since December 2018 and April 2021 respectively, and previously served as Chief Executive Officer, Prosus Ventures, the venture investing arm of Prosus, from 2015 until December 2020. Before that, Mr. Illg served as Chief Operating Officer, eCommerce, at Naspers, Prosus’ parent company, from 2013 to 2015. Prior to Naspers, Mr. Illg served as Vice President and General Manager of New Ventures at Trulia, an online real estate marketplace, from 2012 to 2013. Mr. Illg has served as a member of the board of directors of Skillsoft since June 2021 and also serves on the boards of directors of several private companies. Mr. Illg received a B.S. in economics and an M.B.A. from the University of California, Berkeley.

We believe that Mr. Illg is qualified to serve on our board of directors because of his extensive experience in the venture capital industry, his business and leadership experience and his knowledge of technology companies.

 

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Jeffrey Lieberman has served as a member of our board of directors since February 2015. Since 1998, Mr. Lieberman has worked at Insight Partners, a private equity and venture capital firm, where he currently serves as managing director. Mr. Lieberman currently serves on the board of directors of HelloFresh SE. Mr. Lieberman previously served on the boards of directors of Qualtrics International from 2017 to 2019, Shutterstock from 2007 to 2016, Mimecast from 2012 to 2020, and Cvent from 2011 to 2016. Mr. Lieberman received a B.S. in systems engineering and finance from the University of Pennsylvania.

We believe that Mr. Lieberman is qualified to serve on our board of directors because of his extensive experience as a public company director and his extensive experience in the venture capital industry.

Lydia Paterson has served as a member of our board of directors since December 2019. Ms. Paterson is currently the Chief Financial Officer of OLX Group, a global online classifieds marketplace and a subsidiary of Prosus. Prior to that, Ms. Paterson served as the Vice President, Global Finance and Corporate FP&A for PayPal, an online payments company, from August 2012 to May 2016, and in various finance executive roles at eBay, a multinational e-commerce platform, from March 1999 to August 2012. Ms. Paterson currently serves on the boards of directors of several private companies. Ms. Paterson received a B.B.A. from Simon Fraser University.

We believe that Ms. Paterson is qualified to serve on our board of directors because of her global business and leadership experience, financial expertise and her knowledge of technology companies.

Family relationships

There are no family relationships among any of our executive officers or directors.

Board composition

Our board of directors currently consists of eight members. Prior to completion of this offering, Mr. Barrile will resign from our board of directors. As such, after completion of this offering, we will have seven directors.

After the completion of this offering, the number of directors will be fixed from time to time by our board of directors, subject to the terms of our amended and restated certificate of incorporation and amended and restated bylaws. Each of our current directors will continue to serve as a director until the election and qualification of his, her, or their successor, or until his, her, or their earlier death, resignation, or removal.

Our amended and restated certificate of incorporation will provide that our board of directors will be divided into three classes with staggered three-year terms. Only one class of directors will be elected at each annual meeting of stockholders, with the other classes continuing for the remainder of their respective three-year terms. Our current directors will be divided among the three classes as follows:

 

   

the Class I directors will be                 , and their terms will expire at the annual meeting of stockholders to be held in 2022;

 

   

the Class II directors will be                 , and their terms will expire at the annual meeting of stockholders to be held in 2023; and

 

   

the Class III directors will be                 , and their terms will expire at the annual meeting of stockholders to be held in 2024.

At each annual meeting of stockholders, upon the expiration of the term of a class of directors, the successor to each such director in the class will be elected to serve from the time of election and qualification until the third annual meeting following his, her, or their election and until his, her, or their successor is duly elected and qualified, in accordance with our amended and restated certificate of incorporation. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one third of our directors. This classification of our board of directors may have the effect of delaying or preventing changes in control of our company.

 

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Director independence

Upon the completion of this offering, we anticipate that our common stock will be listed on the                . Under the rules of                , independent directors must comprise a majority of a listed company’s board of directors within one year of the completion of this offering. In addition, the rules of                require that, subject to specified exceptions, each member of a listed company’s audit, compensation and corporate governance and nominating committees be independent. Audit committee members and compensation committee members must also satisfy the independence criteria set forth in Rule 10A-3 and Rule 10C-1, respectively, under the Exchange Act. Under the rules of                , a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

To be considered to be independent for purposes of Rule 10A-3 and under the rules of                 , a member of an audit committee of a listed company may not, other than in his, her, or their capacity as a member of the audit committee, the board of directors or any other board committee: (1) accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries or (2) be an affiliated person of the listed company or any of its subsidiaries.

To be considered independent for purposes of Rule 10C-1 and under the rules of                 , the board of directors must affirmatively determine that each member of the compensation committee is independent, including a consideration of all factors specifically relevant to determining whether the director has a relationship to the company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including: (1) the source of compensation of such director, including any consulting, advisory or other compensatory fee paid by the company to such director and (2) whether such director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company.

Our board of directors undertook a review of its composition, the composition of its committees and the independence of our directors and considered whether any director has a material relationship with us that could compromise his, her, or their ability to exercise independent judgment in carrying out his, her, or their responsibilities. Based upon information requested from and provided by each director concerning his, her, or their background, employment, and affiliations, including family relationships, our board of directors has determined that                 , representing                 of our                  directors, do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the rules of                 .

In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director, and the transactions involving them described in “Certain relationships and related party transactions.”

Board leadership structure

Gregg Coccari, our President and Chief Executive Officer, also serves as Chairperson of the Board of Directors. Our board of directors believes that this leadership structure, coupled with a strong emphasis on independence of the board of directors, provides effective independent oversight of management while allowing both the board of directors and management to benefit from Mr. Coccari’s leadership and business experience. As Chairperson of the Board of Directors and President and Chief Executive Officer, Mr. Coccari has been the director most capable of effectively identifying strategic priorities and vision, coordinating the board of directors’ agenda to focus on discussions critical to the success of our company and executing our strategy and business plans. We believe this experience, together with the outside experience, oversight and expertise of our independent directors, allows for

 

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differing perspectives and roles regarding strategy development that benefit our stockholders. Further, our board of directors believes that Mr. Coccari’s combined role enables decisive leadership, ensures clear accountability and enhances our ability to communicate its message and strategy clearly and consistently to its stockholders, employees and customers.

Role of the board in risk oversight

Our board of directors has an active role, as a whole and also at the committee level, in overseeing the management of our risks. Our board of directors is responsible for general oversight of risks and regular review of information regarding our risks, including credit risks, liquidity risks and operational risks. The compensation committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements. The audit committee is responsible for overseeing the management of risks relating to accounting matters and financial reporting. The corporate governance and nominating committee is responsible for overseeing the management of risks associated with the independence of our board of directors and potential conflicts of interest. Although each committee is responsible for evaluating certain risks and overseeing the management of such risks, our entire board of directors is regularly informed through discussions from committee members about such risks.

Board committees

Prior to the completion of this offering, our board of directors will have an audit committee, a compensation committee and a corporate governance and nominating committee, each of which will have the composition and the responsibilities described below.

Audit committee

Upon the effectiveness of the registration statement of which this prospectus forms a part, the members of our audit committee will be                .                  will be the chair of our audit committee and is an audit committee financial expert, as that term is defined under the SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002, and possesses financial sophistication, as defined under the rules of                . Our audit committee will oversee our corporate accounting and financial reporting process and assist our board of directors in monitoring our financial systems. Our audit committee will also:

 

   

select and hire the independent registered public accounting firm to audit our financial statements;

 

   

help to ensure the independence and performance of the independent registered public accounting firm;

 

   

approve audit and non-audit services and fees;

 

   

review financial statements and discuss with management and the independent registered public accounting firm our annual audited and quarterly financial statements, the results of the independent audit and the quarterly reviews and the reports and certifications regarding internal controls over financial reporting and disclosure controls;

 

   

prepare the audit committee report that the SEC requires to be included in our annual proxy statement;

 

   

review reports and communications from the independent registered public accounting firm;

 

   

review the adequacy and effectiveness of our internal controls and disclosure controls and procedure;

 

   

review our policies on risk assessment and risk management;

 

   

monitoring and assessing, and overseeing the reporting of, any material cybersecurity breaches and associated risks;

 

   

review and monitor conflicts of interest situations, and approve or prohibit any involvement in matters that may involve a conflict of interest or taking of a corporate opportunity;

 

   

review related party transactions; and

 

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establish and oversee procedures for the receipt, retention and treatment of accounting related complaints and the confidential submission by our employees of concerns regarding questionable accounting or auditing matters.

Our audit committee will operate under a written charter, to be effective upon the effectiveness of the registration statement of which this prospectus forms a part, which will satisfy the applicable rules of the SEC and the listing standards of                 .

Compensation committee

Upon the effectiveness of the registration statement of which this prospectus forms a part, the members of our compensation committee will be                 .                  will be the chair of our compensation committee. Our compensation committee will oversee our compensation policies, plans and benefits programs. The compensation committee will also:

 

   

oversee our overall compensation philosophy and compensation policies, plans and benefit programs;

 

   

review and approve compensation for our executive officers and directors;

 

   

prepare the compensation committee report that the SEC will require to be included in our annual proxy statement; and

 

   

administer our equity compensation plans.

Our compensation committee will operate under a written charter, to be effective upon the effectiveness of the registration statement of which this prospectus forms a part, which will satisfy the applicable rules of the SEC and the listing standards of                 .

Corporate governance and nominating committee

Upon the effectiveness of the registration statement of which this prospectus forms a part, the members of our corporate governance and nominating committee will be                 .                  will be the chair of our corporate governance and nominating committee. Our corporate governance and nominating committee will oversee and assist our board of directors in reviewing and recommending nominees for election as directors. Specifically, the corporate governance and nominating committee will:

 

   

identify, evaluate and make recommendations to our board of directors regarding nominees for election to our board of directors and its committees;

 

   

consider and make recommendations to our board of directors regarding the composition of our board of directors and its committees;

 

   

review developments in corporate governance practices;

 

   

oversee ESG matters;

 

   

evaluate the adequacy of our corporate governance practices and reporting; and

 

   

evaluate the performance of our board of directors and of individual directors.

Our corporate governance and nominating committee will operate under a written charter, to be effective upon the effectiveness of the registration statement of which this prospectus forms a part, which will satisfy the applicable rules of the SEC and the listing standards of                 .

Director compensation

Mr. Coccari, our only employee director during the year ended December 31, 2020, did not receive any compensation for his service as a director during the year December 31, 2020. The compensation received by Mr. Coccari as an employee in 2020 is set forth in “Executive compensation.”

 

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Prior to this offering, we have not implemented a formal policy with respect to compensation payable to our non-employee directors. From time to time, we have granted equity awards to attract them to join our board of directors and for their continued service on our board of directors. We also have reimbursed our directors for expenses associated with attending meetings of our board of directors and its committees.

The following table provides information regarding the compensation of our non-employee directors for service as directors for the year ended December 31, 2020:

 

Name   

Option

awards

($)(1)

    

Total  

($)  

 
Eren Bali             —    
Parker Barrile             —    
Kenneth Fox             —    
Heather Hiles      619,000        619,000    
Lawrence Illg             —    
Jeffrey Lieberman             —    
Lydia Paterson      367,000        367,000    

 

(1)

In accordance with SEC rules, the amount in this column reflects the aggregate grant date fair value of stock options granted during 2020 computed in accordance with Accounting Standards Codification (ASC) Topic 718, rather than the amount paid or realized by the director. We provide information regarding the assumptions used to calculate the value of all stock options granted to our directors in Note 13 to our audited financial statements included elsewhere in this prospectus.

The table below shows the aggregate numbers of option awards (exercisable and unexercisable) held as of December 31, 2020 by each non-employee director. None of our non-employee directors had stock awards outstanding as of December 31, 2020.

 

Name    Options outstanding
at year end
 
Eren Bali      —   
Parker Barrile      —   
Kenneth Fox      —   
Heather Hiles      100,000(1)   
Lawrence Illg      —   
Jeffrey Lieberman      —   
Lydia Paterson      100,000(2)   

 

(1)

One-fourth of the shares underlying the option vest on August 26, 2021 and the remaining shares vest monthly thereafter, subject to continued service.

 

(2)

One-fourth of the shares underlying the option vested on December 15, 2020 and the remaining shares vest monthly thereafter, subject to continued service.

Following the completion of this offering, we expect to implement an annual cash and equity compensation program for our non-employee directors.

Compensation committee interlocks and inside participation

None of the members of our compensation committee is or has been an officer or employee of our company. None of our executive officers currently serves, or in the past fiscal year has served, as a member of the board of directors or compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of any entity that has one or more executive officers serving on our board of directors or compensation committee.

 

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Code of business conduct and ethics

Prior to the effectiveness of the registration statement of which this prospectus forms a part, we intend to adopt a written code of business conduct and ethics that will apply to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. Following this offering, the code of business conduct and ethics will be available on our website at www.udemy.com. We intend to disclose future amendments to such code, or any waivers of its requirements, applicable to any principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions or our directors on our website identified above or in a current report on Form 8-K. Information contained on the website is not incorporated by reference into this prospectus and should not be considered to be part of this prospectus.

 

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Executive compensation

Our named executive officers for 2020, which consist of each person who served as our principal executive officer during 2020 and our next two most highly compensated executive officers during 2020, are:

 

   

Gregg Coccari, our President and Chief Executive Officer;

 

   

Greg Brown, our President, Udemy for Business; and

 

   

Llibert Argerich, our Senior Vice President, Marketing.

Summary compensation table

The following table sets forth information regarding the compensation of our named executive officers for the year ended December 31, 2020:

 

Name and principal position    Year     

Salary

($)

    

Bonus

($)(1)

    

Option

awards

($)(2)

    

All other

compensation

($)(3)

    

Total

($)

 

Gregg Coccari

President and Chief Executive Officer

     2020        400,000        240,000        6,939,496        172,918        7,752,414  

Gregory Brown(4)

President, Udemy for Business

     2020        41,667        25,000        6,902,000        417        6,969,084  

Llibert Argerich

Senior Vice President, Marketing

     2020        303,333        121,915        1,110,000        500        1,535,748  

 

(1)

The amounts reported consist of discretionary bonuses paid in 2021 in recognition of our company’s performance in 2020 and the individual’s contributions to that performance.

 

(2)

The amounts disclosed represent the aggregate grant date fair value of the award as calculated in accordance with ASC 718. The assumptions used in calculating the grant date fair value of the award disclosed in this column are set forth in Note 13 to our audited financial statements included elsewhere in this prospectus. These amounts do not correspond to the actual value that may be recognized by our named executive officers upon vesting of the applicable awards.

 

(3)

In 2020, we paid Mr. Coccari a stipend of $9,300 per month to assist with housing and personal travel costs, plus an amount sufficient to ensure that the payment of the monthly stipend was tax neutral to Mr. Coccari. The amounts reported consist of (i) for Mr. Coccari, aggregate stipend payments of $111,636 and aggregate tax neutrality payments of $61,282, and (ii) for Mr. Argerich, amounts paid for matching 401(k) contributions by us.

 

(4)

Mr. Brown commenced employment with us in November 2020.

Outstanding equity awards as of December 31, 2020

The following table sets forth information concerning outstanding equity awards held by each of our named executive officers as of December 31, 2020:

 

     Option awards  
Name   

Grant

date

    

Number of

securities

underlying

unexercised

options

exercisable

(#)

    

Number of

securities

underlying

unexercised

options

unexercisable

(#)

   

Option

exercise

price

($)

    

Option

expiration

date

 
Gregg Coccari      03/14/2019        2,135,852        2,784,189 (1)      3.12        03/13/2029  
     05/19/2020        252,651        1,094,824 (2)      6.58        05/18/2030