Incentive Stock Option (ISO)
Definition
An ISO is a type of stock option available only to employees that, if held for the required minimum periods, lets the holder pay long-term capital gains tax instead of ordinary income tax on the eventual sale.
How it comes up in fundraising
US startups grant ISOs to employees by default because of the tax advantage, reserving the less favorable non-qualified stock option for contractors, advisors, and board members who do not qualify for ISO treatment.
Frequently asked questions
What has to happen for an ISO to keep its tax advantage?
The holder must exercise and hold the shares for at least one year after exercise and two years after the grant date, and the total ISO value vesting in a single year is capped at $100,000 by IRS rules.
What happens to an ISO if an employee leaves the company?
It typically must be exercised within 90 days of departure or it is forfeited, and exercising after that window converts it into a non-qualified stock option for tax purposes.
Put this term to work
Definitions win negotiations only when you are in one. Find the investors who fund your stage and start the conversation.
Browse the investor database