One of the perks of staying with the company for long time and working way up to corporate ladder that you can be offered stock incentives that, in many cases, will increase in value and afford you a huge amount of profit when you sell them. There are many different kinds of stock options and, depending on the type of company that you work for, how long you been there and how high up in the ranks that you are, the options available to you will certainly change. With that in mind we put together a small blog on one type of stock option that is offered once you make it to what will refer to today as ‘the big time’. Enjoy

A type of stock option that is usually offered only to key employees and those who are in top-tier management, incentive stock options (ISO) (also known as statutory or qualified options) allow these employees to receive, in many cases, superior tax treatment that can be quite enticing along with valuable stocks that they can sell down the road for high profits..

There are a number of scheduling details that one must know about incentive stock options.  The date that ISOs are issued is known as the grant date and the exercise date is the date when an employee that’s been offered an ISO exercises their right to buy them. After this second date the employee will then have the freedom to either get rid of the stock right away or hold onto them for a specific period of time.  10 years is the offering period for ISOs (unlike non-statutory options) after which time an employee’s option to buy the stock expires.

ISOs also contain something known as a vesting schedule which is usually three years. At this time the employee usually becomes fully vested and is open to taking advantage of all the options, including ISOs, that are available to him or her.

There are some things about ISOs that resemble non-statutory options including that an employee can either pay cash upfront to exercise them or can acquire them by using a stock swap with no cash changing hands. In some cases an ISO can be exercised at a price that is actually below the current market value, allowing the employee to make an in immediate profit if they choose to sell them right away.

A clawback provision is something that allows employers to take back ISOs if an employee leaves the company for any reason besides their retirement, placement on disability or death. This can also happen if a company suddenly becomes unable to meet its financial obligations with the ISO options.

As we stated earlier ISOs are typically offered only to executives and key company employees, a form of legal discrimination as most other types of employee stock plans are offered to any employee who meets certain minimum company requirements.  In some ways an ISO is similar to a nonqualified retirement plan that is offered to a company’s top people whereas a qualified plan must be offered to all employees.

As far as tax treatment, ISOs receive the most favorable tax treatment of any type of employee stock purchase plan, setting them apart from practically all other forms of compensation that is share-based. That being said, in order to be able to qualify for an ISO a company employee must meet certain criteria and obligations. One of these is a  qualifying disposition, when an ISO is sold at least one year after options were exercised and two years after the grant date. On the other hand, a disqualifying disposition is when the sale of an ISO, for whatever reason, does not meet the requirements of the prescribed holding period.

Similar to non-statutory options,  when an ISO is either granted or an employee is vested there are no tax consequences.  That being said, the rules concerning taxes for the exercise of an ISO and its sale can, in many cases, be quite complex. The bottom line is that an ISO will, in most cases, provide a substantial profit to its holder. In most cases if  they’re available to you the best thing to do be to consult your financial advisor or an HR representative from your company to find out what your options are.

We hope you enjoyed this blog about incentive stock options and that you will one day and work your way up to where you yourself can receive them. If you’re already there congratulations and we hope that this article has given you a little bit of insight as to how they work. In any case please come back sometime soon and visit us again as were always providing excellent blogs filled with equally excellent advice about all things financial. See you then.

Filed under: Investing

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