Kodiak Sciences Inc. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 116 The following tables present the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis (in thousands): Fair Value Measurements at December 31, 2018 Level 1 Level 2 Level 3 Total Assets: Money market funds................................................................... $ 87,957 $ — $ — $ 87,957 Total ........................................................................................... $ 87,957 $ — $ — $ 87,957 There was no liability measured at fair value on a recurring and non-recurring basis as of December 31, 2018. Fair Value Measurements at December 31, 2017 Level 1 Level 2 Level 3 Total Assets: Money market funds................................................................... $ 1,217 $ — $ — $ 1,217 Total ........................................................................................... $ 1,217 $ — $ — $ 1,217 Liabilities: Preferred stock warrant liability ................................................. $ — $ — $ 2,300 $ 2,300 Total ........................................................................................... $ — $ — $ 2,300 $ 2,300 There were no transfers of assets or liabilities between the fair value measurement levels during the years ended December 31, 2018 and 2017. The following table summarizes the changes in fair value of the Company’s Level 3 financial instruments (in thousands): Preferred Stock Warrant Liability 2018 Derivative Instrument Liability Fair value as of December 31, 2016 .......................................................................... $ — $ — Issuance of financial instruments ................................................................................. 1,040 — Change in fair value included in other income (expense), net..................................... 1,260 — Fair value as of December 31, 2017 .......................................................................... 2,300 — Issuance of financial instruments ................................................................................. — 6,603 Change in fair value included in other income (expense), net..................................... 2,700 1,988 Conversion of preferred stock warrants into common stock warrants......................... (5,000) — Extinguishment of 2018 derivative instrument liability............................................... — (8,591) Fair value as of December 31, 2018 .......................................................................... $ — $ — In October 2018, the preferred stock warrants converted into common stock warrants and the 2018 derivative liability was extinguished in connection with the Company’s IPO. The Company used a hybrid method between the probability-weighted expected return method (“PWERM”) and the Black-Scholes option pricing model (“OPM”) to estimate the fair value of the preferred stock warrants, 2017 convertible notes and derivative instruments as of December 31, 2017. The PWERM is a scenario-based analysis that estimates value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to the Company, as well as the economic and control rights of each share class. The Company considered the probability of occurrence of an IPO, the enterprise value and the discount rate, which is a blended rate that reflects the risk associated with the business during the forecasted period, as inputs to the PWERM. Estimates of fair value using the OPM are affected by assumptions regarding a number of complex variables, including expected term, expected volatility, expected dividend, and risk-free interest rate. At December 31, 2017, the fair values recognized for the preferred stock warrants, 2017 derivative instrument, and for disclosure purposes of the fair value of 2017 convertible notes, assumed a discount rate of 57.5%, volatility of 75%, a risk-free rate of 1.97%, no dividends expected to be paid, and an expected term based on the timing for the IPO scenario and the private company scenario. The estimated fair value of the 2017 convertible notes (Level 3 instrument for disclosure purposes) was $19.0 million as of December 31, 2017.