100K ISO Limitation on Qualified Stock Option Grants

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In any given calendar year, you can only vest $100k worth of ISOs. Any other options that vest will become NSOs until the next calendar year.

Reason for the 100K Limit on ISOs

Incentive Stock Options (ISOs), as opposed to Non-qualified Stock Options (NSOs aka NQSOs), are subject to favorable IRS treatment. The main benefit is not having to pay ordinary income tax when you exercise like you do with NSOs. ISOs are still subject to Alternative Minimum Tax (AMT) to prevent wealthy individuals from sheltering all of their income this way.

The $100K Limit prevents people from abusing ISOs as a tax shelter. See this article link for a more complete list of the differences between an ISO and an NSO.

What is the 100k Rule?

The $100K Limit means that the maximum amount of ISOs that an employee can receive per year is $100,000.

The calculation for the rule is simple. First, take the total number of options granted then divide by the number of years it will take to fully vest. Most options are not exercisable at inception and typical grants vest over a 4 year period. This will give you the number of options that will become exercisable per year.

Next, multiply the above quantity by the options' strike price. If the resulting value is lower than $100,000, the options are not subject to the rule. If it is higher, any excess options and subsequent grants above the $100K limit must become NSOs. Thus, they are subject to immediate withholding tax at the time of exercise rather than AMT.

Early Exercise

One wrinkle is if the grant is eligible for early exercise aka all the options are immediately exercisable. In this case the IRS says that the entire grant is subject to the $100k rule. Early exercise can be great for employees, but it could lead to more NSOs even if you don't exercise early. Note that the same issue arises if the entire grant vests in a single year.

Cliff Vesting

It is very common for employee stock option grants to have a one year cliff when 25% of your grant vests all at once to encourage you to stay with the company at least one year. If your ISO grant was maximized by granting $100K per year, then your company may have inadvertently triggered NSO re-characterization on some of your options. The 100K maximum is based on the tax year in which they options first became exercisable as opposed to the time along the way. For example, let's say you have option to purchase 400,000 shares at a $1 strike price. These vest over a 4 year period with 25% vesting at the 1 year anniversary and the rest vesting 1/48 per month over the remaining 3 years. Let's say that your option grant date anniversary is Jan 15th each year. On Jan 15 of the year of your first anniversary, you'll vest 25% (100,000 shares) but you'll proceed to vest 11 more months of shares during the same tax year. That would be approximately 91,666 more shares which brings your total to 191,666 shares vested during the same tax year. At $1 per share strike price, you exceed the 100K rule by 91,666 shares which would become NSOs while the other 100,000 shares remain ISOs.


Companies commonly add an acceleration clause to the option grant if they are acquired. Acceleration means that some or all of the unvested shares will suddenly vest. The additional vesting is also subject to the 100K Limit. Any accelerated shares exceeding the 100k amount will convert to NSOs.

Those clauses are usually double trigger which means that acceleration only occurs if a second event such as being laid off or demoted also occurs.

If the M&A involves a cash out, then the consequences are greatly reduced. This is because ISOs and NSOs are treated similarly if exercised and immediately sold. For ISOs, this is called a disqualifying disposition.

Exercising stock options can require a lot of capital and time to liquidity can be lengthy. As your shares vest, you may be tempted to sell to recover your original investment or fund other financial needs. However, a sale truncates any possibility of future upside on the shares being sold.

An alternative solution for partial liquidity is to get an advance from ESO Fund. This is an attractive solution since you retain ownership of the stock plus the ability to achieve unlimited upside. Furthermore, if the stock becomes worthless, ESO absorbs the loss, not you. Feel free to reach out using our contact form below if you have any questions.

This innovative service promotes and enables a healthier relationship between companies and employees. I my opinion it's valuable to employees and great for the overall tech environment and economy. It is good for nobody when employees feel trapped because they can't afford to leave. In less extreme cases exercising can be expensive and somewhat risky and this is simply a good smart hedge and a good square deal. Brilliant!

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