ISOs › Basics

With expert insights from the editor-in-chief of myStockOptions.com, this video covers the essential aspects of employee stock options that you must know to make the most of them, including the key concepts of vesting, exercise, and the option term. Running time: 4:12.

Podcast included! Stock options are a major element of your long-term incentive compensation, offering tremendous potential to accumulate personal wealth. Given your stock options' complexity, it’s essential to develop a strategy to realize their full potential.

Stock options aren't just for the folks on mahogany row any more. But turning stock options into the real green stuff takes some know-how. You need to know certain features of your grant to decide when to exercise your options and sell the stock.

You cannot cash in your stock options immediately. The options must first be vested, and you don't own them forever.

Exercising stock options is like playing a hand of cards: if your plays are strategic, you'll probably "know when to hold them and when to fold them." But, as always, rules and regulations apply to what you can do.

Avoid the fumbles others made with options during past ups and downs in the stock markets. Situations where common errors tend to arise can be classed into nine categories, including option-term expiration, job termination, corporate mergers, financial planning, and various life events.

Avoid the mistakes others made during prior ups and downs in the stock markets. Common errors arise in nine different situations, including job termination, mergers, financial planning, term expiration, and various life events.

Podcast included! Get a sense of what you should, and should not, expect in the terms of your stock option grant. A major survey of companies looks at trends in vesting schedules, post-termination exercise rules, and other plan features.

PowerPoint presentation (in PDF) that the editorial team of myStockOptions.com developed to provide a convenient crash course on the basics of incentive stock options. (Premium members may request permission to use it at their companies.)

Apart from not needing to withhold for ISOs or pay Social Security and Medicare tax, employers derive no substantial benefit from granting ISOs instead of NQSOs. Plus, ISO taxation can be more complex for employees...

The tax code is very specific about what you must do. If you want all the appreciation over the exercise price to be taxed upon sale at favorable long-term capital gains rates, you must...

"Disqualifying disposition" is the legal term for selling, transferring, or exchanging ISO shares before satisfying the ISO holding-period requirements: two years from date of grant and one year from date of exercise. If you sell, transfer, gift, or short the stock too soon, you lose...

If you make a disqualifying disposition with your ISO or ESPP shares...

A disqualifying disposition occurs if you sell, transfer, exchange, gift, or donate the stock that you acquired without...

No. You have a disqualifying disposition just for the ISO shares that are...

Companies make some information available voluntarily, while the reporting of other information is mandatory. Section 6039(a) of the Internal Revenue Code requires companies to send an information statement to employees who have exercised incentive stock options or have made purchases in a tax-qualified Section 423 employee stock purchase plan. ISO exercises are reported on IRS Form 3921. ESPP purchases are reported on IRS Form 3922...

The Internal Revenue Code and IRS regulations prohibit transfers, so grant agreements cannot allow ISOs to be transferred in divorce. When divorce occurs, under the property settlement either...

No. Similarly, the transfer of share certificates into a brokerage account to be held in street name would not be a disposition...

A transfer of shares incident to divorce is not a disqualifying disposition, but when the...