There was a great response to last week’s post about the Incentive Stock Option (ISO) 100k rule along with some questions about more intricate and delicate situations. Here are two more examples that explain how this limit works, and what you can do about it.
Multiple Grants – 100k Rule – Annual Vesting
The first inquiry was about how does the ISO 100k rule applies to the total value across all ISO grants for an individual.
We have two grants – Grant 1 and Grant 2. The specifics of the multiple grants and grant dates are as follows:
Grant 1
Options Granted: 100,000
Grant Date: 3/1/2019
Vest Schedule: 4 Year Vesting – 25% each year
Fair Market Value (FMV): $1.00
Early Exercisable: No
Grant 2
Options Granted: 50,000
Grant Date: 3/1/2020
Vest Schedule: 4 Year Vesting – 25% each year
Fair Market Value (FMV): $4.00
Early Exercisable: No
By doing some quick math, it may seem that each grant is below $100,000. However, we must look at the total amount across all grants.
When we add them together, the results are:
| Grant 1 | Grant 2 | Total | ||||
|---|---|---|---|---|---|---|
| Year | Shares Exercisable | Value Exercisable | Shares Exercisable | Value Exercisable | Shares Exercisable | Value Exercisable |
| 2019 | 25,000 | $25,000 | 25,000 | $25,000 | ||
| 2020 | 25,000 | $25,000 | 12,500 | $50,000 | 37,500 | $75,000 |
| 2021 | 25,000 | $25,000 | 12,500 | $50,000 | 37,500 | $75,000 |
| 2022 | 25,000 | $25,000 | 12,500 | $50,000 | 37,500 | $75,000 |
| 2023 | 12,500 | $50,000 | 12,500 | $50,000 | ||
| Total | 100,000 | $100,000 | 50,000 | $200,000 | 150,000 | $300,000 |
However, the total amounts across grants do not exceed $100,000. You do not violate the ISO 100k rule because the total amounts in all years are below $100,000.
Annual and Monthly Vesting
Next, we have a very similar scenario as the first one – the same amount of options per grant, same grant date, same FMV, and no early exercise. The only difference is the vesting schedule on Grant 2. The shares vest monthly over 4 years after a one year cliff.
Grant 1
Options Granted: 100,000
Grant Date: 3/1/2019
Vest Schedule: 4 Year Vesting – 25% each year
Fair Market Value (FMV): $1.00
Early Exercisable: No
Grant 2
Options Granted: 50,000
Grant Date: 3/1/2020
Vest Schedule: 4 years – monthly with one year cliff
Fair Market Value (FMV): $4.00
Early Exercisable: No
| Grant 1 | Grant 2 | Total | ||||
|---|---|---|---|---|---|---|
| Year | Shares Exercisable | Value Exercisable | Shares Exercisable | Value Exercisable | Shares Exercisable | Value Exercisable |
| 2019 | 25,000 | $25,000 | 25,000 | $25,000 | ||
| 2020 | 25,000 | $25,000 | 25,000 | $25,000 | ||
| 2021 | 25,000 | $25,000 | 21,875 | $87,500 | 46,875 | $112,500 |
| 2022 | 25,000 | $25,000 | 12,500 | $50,000 | 37,500 | $75,000 |
| 2023 | 12,500 | $50,000 | 12,500 | $50,000 | ||
| 2024 | 3,125 | $12,500 | 3,125 | $12,500 | ||
| Total | 100,000 | $100,000 | 50,000 | $200,000 | 150,000 | $300,000 |
With this example, you surpass the ISO 100k limit in 2021 due to the different vesting schedule. To remedy this, you can ask your employer to have the shares in Grant 2, Year 1 split into 18,750 ISOs and 3,125 NSOs. This way you do not violate the ISO 100k limit.
There are many situations and factors to consider when examining the ISO 100k rule, and it can get complicated very quickly.
Any ISO scenarios that you’d like to run by me? We can sit down over some pizza and discuss.