Incentive Stock Options: How ISOs Work & Tax Treatment
Learn how incentive stock options work, including their tax benefits and how they compare to other types of equity. Incentive stock options (ISO) are a type of equity that give employees the right to purchase company stock at a predetermined price, known as a strike price or exercise price. ISOs are required to be granted with an exercise price at or above the fair market value (FMV) of the company's common stock on the grant date, making them a popular form of equity compensation at startups and other fast-growing companies. ISOs are a type of stock option, and are not actual shares of stock. You must exercise your options to become a shareholder. For employees, ISOs offer the opportunity to buy shares at a set price and benefit as the stock appreciates. Unlike other option types, ISOs also offer significant tax advantages when certain holding conditions are met. For companies, ISOs are a cost-effective way to attract, motivate, and retain talent with competitive compensation packages