By |Published On: Feb 12, 2024|Categories: Financial Planning, ISOs|

Over the course of many conversations with Mikaela – the fun loving tech executive – we reviewed quite a lot. Our latest conversation was about Incentive Stock Options (ISO) strategies and how powerful they can be.

Mikaela and I reviewed all of her documents so that she can make the best decision to create the future she wants. Here’s the framework that we used and you can employ it too – understand what you own and how to make the best of your ISOs.

ISO Strategy Overview

1.) – Round up Equity Grant Data and Put Together the Vesting Schedule

First, there are many documents to find, read, and download to understand what you have:

  1. Equity grant document
  2. Vesting schedules
  3. Holding report
  4. Sales history report
  5. Exercise history report

The important information to gather from these documents is:

  1. The cost of the option
  2. The option’s expiration date
  3. How much can you make by exercising the option?
  4. Post Termination Exercise Window (PTE Window) – the ability to exercise ISOs ends 90 days after termination
  5. Extended PTE Window – a clause that extends the PTE Window beyond 90 days but converts ISOs to NSOs
  6. $100k Rule – maximum cumulative vest value in a calendar year, above which ISOs are converted to NSOs
  7. Have ISOs converted to NSOs?

Step one is an analysis to understand what options you have accumulated over the years and understand their complexity, tax implications, and start putting together a strategy.

2.) – Organize Historical ISO Exercises and Prepare for Next Exercise

Then, there is more fact gathering:

  1. Holding report
  2. Exercise history report

Accordingly, here are the factors from these documents:

  1. The number of ISOs and your cost to exercise them
  2. Understand the difference between value of shares and your cost to exercise them (the ISO spread)
  3. Alternative Minimum Tax (AMT) Preference Item – ISO Spread is needed for AMT purposes
  4. If there is AMT, do you have AMT credits?
  5. 83(b) election – an election within 30 days of early exercise where you pay taxes on the spread in the year of election rather than the year of vesting
  6. When do the exercised options meet qualifying disposition rules?

With this data, we can determine important dates and options prices to help you make decisions.

3.) – Collect Historical ISO Sales, Prepare for Next Sale Opportunity, and Clarify ISO Strategy

In the last step there is still additional information to gather:

  1. Holding report
  2. Sales history report

The final specifics to ponder:

  1. The grant from which exercised options were sold
  2. The number and sale price of options
  3. Qualifying or disqualifying disposition
  4. Does it make sense to sell the exercised ISOs or do a cashless exercise of unexercised ISOs?

Given this information, when does it make sense to sell exercised ISOs or do a cashless exercise? We will look at your held options and prepare what a sale would look like, what’s the best way for you to achieve liquidity, and the best way to optimize your taxes.

When you use Incentive Stock Options strategies and make the most of them, you can transform your entire life, go to the South Pacific and learn to scuba dive, or anything else that makes your mouth water.