If you hold ISOs and your company is acquired, then you may trigger the 100K Limit Rule if your option agreement has an acceleration feature. Suddenly vesting more of your unvested options will increase the total number of options you vest for the year. Although your original grant was designed to stay under the 100K Limit, you may suddenly exceed it unintentionally.  As a result, some of your ISOs will be converted to NSOs in order for you to stay compliant. NSOs are more expensive since they are subject to ordinary income tax including the Medicare surtaxes.

On the other hand, if you exercised some of your ISOs in advance, then the number of shares exceeding the 100K Limit due to acceleration will be reduced. Moreover, you could also be eligible for long term capital gains or at least a disqualifying disposition which avoids the Medicare surtax.

If you hold employee stock options or restricted shares in a private company funded by institutional venture capital, feel free to reach out via the form below for more information on how we can assist you with non-recourse funding. By doing so, you can not only avoid the risks associated with investing directly in a startup but possibly improve your taxes as well. For ways to reduce stock option taxes or specific tax related support related to stock option exercises, please contact Scott Chou.

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