Incentive Stock Options: Post-Termination of Service Exercise Periods

The 90-day post termination of employment exercise period for stock options is under attack.

A lot of companies are moving away from 90 days. You can find a list of them in a GitHub repo maintained by Zach Holman. Zach also has written an impassioned post about this issue.

Why is the 90-day rule problematic? Because if you are fired, or quit, and you do not have the funds to exercise your stock options within 90 days of termination, you lose them.

Some people might ask the following technical question:

What if I have an ISO? Doesn’t it have to prohibit me from exercising beyond 3 months of my termination of employment or it is not an ISO?

This is a good question, for sure.

You can find the answer the plain language of the Internal Revenue Code. Section 422(a) says the following:

Section 421(a) shall apply with respect to the transfer of a share of stock to an individual pursuant to his exercise of an incentive stock option if—
(1) no disposition of such share is made by him within 2 years from the date of the granting of the option nor within 1 year after the transfer of such share to him, and
(2) at all times during the period beginning on the date of the granting of the option and ending on the day 3 months before the date of such exercise, such individual was an employee of either the corporation granting such option, a parent or subsidiary corporation of such corporation, or a corporation or a parent or subsidiary corporation of such corporation issuing or assuming a stock option in a transaction to which section 424(a) applies.

In other words, you don’t qualify for the benefits of incentive stock options under the statute if you exercise beyond 3 months after termination of employment. But that doesn’t mean your stock option couldn’t have a 10 year exercise period–be styled as an ISO–and just tell you that if you exercise later than 3 months after your employment ends the option will be treated as a nonqualified stock option.

There is also a discussion of this at

One misconception relates to the 3-month period for exercise. Many employers understand, mistakenly, that the ISO rules require expiration of the ISO at the end of this period. The rule is not that strict. An option could be exercisable for more than 3 months after termination of service; it simply would not qualify for ISO status if it is exercised more than 3 months after termination of employment for a reason other than disability or death.

This blog post does not constitute legal or tax advice.

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  • Joe, how does the emerging company CFO deal with the surprise expense deduction, when the ISO/NQ choice is essentially delegated to the employee? I wonder if as a practical matter one really has to choose? Just thinking out loud . . .


      So when a co chooses ISOs over NQOs it is making the choice to potentially forego the deduction. If one shows up it is a bonus!

    • When a company decides to grant an ISO, they are choosing to give up the deduction (potentially). So if it turns out they get the deduction it is a bonus.

  • elizabeth

    Hi Joe, are you able to confirm if the ‘expiry date’ is the last date on which a stock option may be exercised by an optionee or if all transactions need to occur before the listed expiry date?


      I would need to see the actual documents to help you here.