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Under a standard four-year time-based vesting schedule with a one-year cliff, 1/4 of your shares vest after one year. After the cliff, 1/36 of the remaining granted shares (or 1/48 of the original grant) vest each month until the four-year vesting period is over. After four years, you are fully vested.
To receive the incentive, you must hold (keep) ISOs for at least one year after exercise and two years after the grant date. If you hold your stock for at least a year after purchase, you will pay the lower capital gains tax rate on the increase in value.
An incentive stock option (ISO) is a corporate benefit that gives an employee the right to buy shares of company stock at a discounted price with the added benefit of possible tax breaks on the profit.
As long as the total value of exercisable options that vest in a given tax year does not exceed $100,000, the employee won't surpass the ISO $100K limit. This is one reason why it's important to pay attention to the vesting period outlined in the option grant.
There are many requirements on using ISOs. First, the employee must not sell the stock until after two years from the date of receiving the options, and they must hold the stock for at least a year after exercising the option like other capital gains. Secondly, the stock option must last ten years.
Non-qualified stock options are more straightforward, as the tax implications at exercise are generally agreed to be easier to understand. Incentive stock options, while more complicated, offer the opportunity for long-term capital gains if you meet the requisite holding period requirements.
Vesting: ISOs usually contain a vesting schedule that must be satisfied before the employee can exercise the options. The standard three-year cliff schedule is used in some cases, where the employee becomes fully vested in all of the options issued to them at that time.
Other employers use the graded vesting schedule, which allows employees to become invested in one-fifth of the options granted each year, starting in the second year from the grant. The employee is then fully vested in all of the options in the sixth year from the grant.