The $100,000 ISO limit and early exercise

Only $100,000 of stock, valued at the grant-date fair market value, may first become exercisable as ISOsEquity & financingIncentive stock optionA stock option meeting IRC §422: employees only, granted under a stockholder-approved plan, strike at least fair market value, exercisable for no more than ten years. No regular tax at grant or exercise (the spread can trigger AMT); gain is capital if the stock is held two years from grant and one from exercise. Only $100,000 of stock, valued at grant, may first become exercisable in a calendar year in any calendar year; the rest are NSOsEquity & financingNonstatutory stock optionA stock option that is not an ISO — any grant to a contractor or director, and an ISO's excess over the $100,000 limit. With no readily determinable value at grant, the spread is ordinary income at exercise, as wages for an employee. On ordinary vesting the limit rarely bites, because a grant becomes exercisable a slice a year. Early exerciseEquity & financingEarly exerciseExercising options before they vest, receiving restricted stock the company may repurchase if the holder leaves. Paired with an 83(b) election, the holding periods and the tax measurement start at exercise makes the whole grant exercisable at once.

Early exercise turns options into restricted stock the company can buy back, so the holder can file an 83(b) election within 30 days and start the ISO holding periods at once: ISO stock must be held two years from grant and one year from exercise for the gain to be capital — exercised at grant, that is November 1, 2029 at the earliest.