Incentive Stock Option Plans (ISOs) are a type of employee stock option granted by a company to its employees as a form of incentive compensation. Here are the key characteristics of ISOs:
- Tax Advantage: ISOs provide potential tax benefits compared to other types of stock options. Employees typically do not have to pay regular income tax when they exercise their options (although alternative minimum tax may apply).
- Grant Requirements: ISOs must meet specific requirements under the Internal Revenue Code, including being granted with an exercise price not less than the fair market value of the stock on the date of grant.
- Hold Period: To qualify for favorable tax treatment, employees must hold the stock acquired through ISOs for at least two years from the date of grant and one year from the date of exercise.
- Employee Eligibility: ISOs are typically granted to key employees and must be exercised within a specified period after leaving the company or they will expire.
- Company Benefit: Companies use ISOs to attract and retain talent, align employee interests with shareholder interests, and provide employees with potential ownership in the company.
Overall, ISOs are designed to motivate employees to contribute to the company’s growth and success, offering them the opportunity to share in the company’s future financial performance.
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