Iso Option Agreement

An ISO Option Agreement: What You Need to Know

An ISO option agreement is a type of stock option available to employees of a corporation. ISO stands for “incentive stock option.” Incentive stock options offer certain tax advantages compared to other types of stock options. Understanding the basics of an ISO option agreement is crucial for employees seeking to participate in such plans.

What is an ISO option agreement?

An ISO option agreement is a contract between an employee and a corporation, under which the employee is granted an option to purchase stock in the corporation at a fixed price. The option is an incentive stock option if it meets certain requirements under the Internal Revenue Code.

How does an ISO option agreement work?

An employee is granted an ISO option agreement that allows them to buy stock in their employer’s company at a predetermined price. The price, called the “strike price,” is usually set at the stock’s fair market value on the date the option is granted.

The employee can then exercise the option by buying the stock at the predetermined price. If the stock’s value has risen since the option was granted, the employee can purchase the shares at a discount, potentially creating a financial gain.

What are the advantages of an ISO option agreement for the employee?

The most significant advantage of an ISO option agreement is that it can provide tax benefits. If an employee exercises an ISO option and holds the stock for at least two years from the date the option was granted and at least one year from the date of exercise, any gain upon sale is taxed as a long-term capital gain, which is subject to a lower tax rate than ordinary income tax.

Are there any limitations to ISO option agreements?

There are some restrictions that apply to ISO option agreements. For instance, the total fair market value of stock granted to an employee in any calendar year cannot exceed $100,000. Additionally, an employee must exercise the option within ten years of the date it was granted.

In conclusion, an ISO option agreement is a powerful tool that can provide significant financial benefits to employees. It is critical for employees to understand the requirements and limitations of ISO option agreements to maximize the benefits available to them.