The Incentive Stock Option (ISO) 100k limit is a bit complicated. A single option grant, multiple option grants, and early exercise are a few of the dynamics associated with ISOs. Sure, the limit of $100,000 per calendar year is straightforward, but a lot of times it can get complicated.
Limit Explained
First off, the ISO 100k limit prevents employees from receiving more than $100,000 worth of ISOs in a calendar year. Anything in excess of $100,000 is treated as a Nonqualified Stock Option (NSO).
This rule is in place by the IRS because ISOs have preferential tax treatment compared to NSOs. It’s important to understand when you meet the ISO 100k limit and plan accordingly.
In Depth Illustration
The ISO 100k limit applies when the ISO is granted. We need to look at the fair market value (FMV) of the stock at grant and then multiply by the vested ISO amount per year. If FMV multiplied by the vested ISO amount per year is above 100k then you violate the rule.
If the 100k limit is exceeded, the company should split the grant into ISOs and NSOs so you don’t overrun the limit.
For example, you have an ISO grant of 100,000 shares when the stock FMV was $2.
With regular 4 year vesting (25% each year), you won’t surpass 100k in any year (100,000 * 1/4 = $25,000).
However, in year 2, the FMV is $5 and you exercise the vested 25,000 shares. This amount is $125,000 (25,000 * 5 = $125,000). This does not violate the 100k rule because the stock FMV is based on the grant date which is $2 in this scenario.
From a tax perspective, the Alternative Minimum Tax (AMT) spread is $75,000 (25,000 * ($5 – $2) = $75,000). Check with your CPA to see if you must pay the AMT.
Other ISO Scenarios
If the grant was eligible for early exercise, and you exercised all of the shares, then year 1 exercisable value is $200,000 (100,000 * 2 = $200,000)
This exceeds 100k, and the company should split the grant to 50,000 ISO and 50,000 NSO.
When you have multiple ISO grants, add up all vested ISO values across all grants to see if you are within the ISO 100k limit.
If you have questions on the ISO 100k rule – multiple grants, early exercise, or anything else, please feel free to reach out.