Do you need help understanding the options granted to you?
Incentive Stock Options (ISOs) are a form of equity compensation that provides you with the right to buy a certain number of shares of your company’s stock at a predetermined price, known as the strike price. The benefit comes when the market price exceeds the strike price, and you can buy the shares at a discount.
Do you need help determining the tax implications at grant?
Unlike Restricted Stock Units (RSUs), there are usually no tax implications when ISOs are granted. However, tax implications arise when you exercise the options and later sell the shares.
Are you subject to a vesting schedule?
Yes, ISOs are typically subject to a vesting schedule, which might be based on time, performance milestones, or a combination of both. This schedule determines when you’ll be able to exercise the options.
Will you be subject to clawback provisions?
Clawback provisions depend on the specific terms of your ISO agreement. Some companies include such provisions to protect themselves. A clawback provision allows the company to reclaim the options or the benefits you derived from them under certain conditions, like if you leave the company within a certain period or if there’s a restatement of financial results
Do you need to review how the termination of your employment (voluntarily or involuntarily), disability, or death might affect your interests under your plan?
The impact of employment termination, disability, or death on your ISOs depends on your specific plan’s rules. Generally, if you leave the company (voluntarily or involuntarily), you might have a certain period (commonly 90 days) to exercise vested options. Disability or death can also trigger specific provisions allowing your heirs or estate to exercise the options.
Do you need help determining the value of your interests?
The potential value of your ISOs can be estimated by comparing the exercise (strike) price of your options with the current market value of the shares. However, the actual value will depend on the market value of the shares when you decide to exercise and eventually sell the shares.
Do you need to assess your employer’s future equity value and long-term viability?
Assessing the future value of your employer’s stock and the company’s long-term viability is crucial in determining when to exercise your ISOs. Factors like financial performance, market position, industry trends, and economic outlook can impact the future value of the company’s shares.
Do you need to confirm the status of your ISOs?
It’s important to understand the current status of your ISOs, including their vesting schedule, the number of options that have vested, and the remaining duration until expiry. This information can usually be obtained from your company’s HR department or the brokerage platform where your ISOs are managed.
Do you need help determining the income tax implications of exercising vested options?
When you exercise ISOs, the difference between the fair market value at the time of exercise and the exercise price is known as the “bargain element.” This is not considered ordinary income, but it may subject you to the Alternative Minimum Tax (AMT). When you sell the shares, you will also be subject to capital gains taxes.
Are you permitted to exercise early and purchase stock before vesting?
Some companies offer what’s known as “early exercise” options. This allows you to exercise your options before they have vested. It can have tax advantages, but it also comes with risks because unvested shares may be subject to repurchase by the company if you leave.
Do you lack the funds necessary to do a cash exercise?
If you don’t have the funds to exercise your options, you could consider a cashless exercise, also known as a “same-day sale” or “sell-to-cover,” where you simultaneously exercise your options and sell enough of the shares to cover the exercise price and taxes.
Do you want the flexibility to avoid double taxation in the event you may choose to sell within one year of exercise?
To receive long-term capital gains treatment (and potentially lower tax rates), you need to hold the shares for more than one year after exercise and two years after the grant date. If you sell within one year of exercise, any gain is considered a short-term capital gain and is taxed at ordinary income rates.
Does your company require pre-clearance or have blackout or window periods that might affect your ability to trade your shares?
Some companies have trading restrictions, often imposed on insiders or employees, to prevent unfair trading based on non-public information. This might involve a requirement for pre-clearance of trades or restricted trading periods known as blackout or window periods. You would need to check your company’s specific policy or consult with your HR department or legal team.
Do you own unvested shares due to an early exercise?
If you’ve taken advantage of an early exercise provision in your ISO agreement, you may own unvested shares. These shares can be risky because if you leave the company before they vest, the company may have the right to repurchase them, often at the price you paid, which could result in a financial loss if you paid taxes on a value that subsequently declined.
Do you need help understanding the tax consequences of the sale of shares acquired through your options?
When you sell shares acquired through ISOs, you’re generally subject to capital gains taxes. If you sell the shares more than two years from the grant date and more than one year from the exercise date, your gain is treated as long-term capital gains, which generally has lower tax rates compared to short-term capital gains or ordinary income. However, the bargain element at exercise may be subject to the Alternative Minimum Tax (AMT).
Do you need help tracking your regular tax basis, AMT basis, and your Minimum Tax Credit?
The cost basis for ISO shares is generally the price you paid to exercise the options. However, for AMT purposes, the basis includes the bargain element. You may be eligible for a Minimum Tax Credit for the AMT paid in a prior year, but calculating and tracking this can be complex. It’s recommended to seek advice from a tax professional.
Do you need to increase your withholdings (beyond any employer withholdings) or make estimated payments for taxes attributable to your options?
Depending on the number of ISOs exercised, you may trigger the Alternative Minimum Tax (AMT) and you may need to make estimated tax payments. This can be complex and might require consultation with a tax professional.
Do you need to evaluate your company stock position?
Regularly assessing your company stock position is important to understand your risk exposure and potential reward, especially if a significant portion of your net worth is tied up in company stock due to your ISOs.
Do you need a plan to mitigate concentration risk?
If a significant portion of your wealth is tied up in your company’s stock, you may face concentration risk. Diversification strategies or protective put options may help to mitigate this risk.
Is the benefit of waiting to make a qualifying disposition greater than the risk of a price decline while holding shares?
This depends on your individual situation, including the potential tax benefits of a qualifying disposition, the market outlook for your company’s shares, and your personal risk tolerance.
Is there a risk that your company will be acquired within the next two years?
An acquisition could affect your ISOs in various ways, including potential acceleration of vesting or conversion of your ISOs into options for the acquiring company’s stock. Understanding this risk is important for planning purposes.
Do you need help factoring in the risks of a stock price decline when considering whether to exercise and/or to make the IRC §83(b) election for AMT purposes?
The §83(b) election allows you to pay taxes at the time of exercise based on the bargain element, potentially lowering your tax burden if your company’s stock price rises significantly. However, this carries risk if the stock price declines after exercise. This decision should be made with the help of a tax professional.
Do you need to address your options in your estate plan or in a pending divorce?
Yes, ISOs can be a significant asset and should be addressed in estate planning and divorce settlements. However, transferring ISOs in a divorce can have tax implications, so it’s important to seek professional advice.
Do you need to consider any state-specific issues?
Different states have different rules for taxation of ISOs, so understanding any state-specific implications is important. Consult a tax advisor familiar with your state’s rules.
Do you have future financial goals that your options could help to achieve?
ISOs can contribute towards your financial goals, whether it’s retirement, buying a home, or funding education. A financial planner can help align your financial plans with your ISO strategy.