If you’ve recently landed a job at a startup, then it’s likely that one part of your compensation package stood out to you: “You’ll receive 25,000 ISO stock options.”

Sounds exciting, but you don’t exactly know what an ISO stock option is. What is an ISO? And how much is it worth?

Let’s break down incentive stock options (ISOs).

This guide breaks down incentive stock options (ISOs)—how they work, how they’re taxed, when they become valuable, and what to watch out for if you’re sitting on a stack of paper stock options.

ISO, defined

At a high level, an ISO is the right to buy company stock at a fixed price, called your strike price or exercise price, which is set on the day you're granted the option.

You’re not getting stock. You’re getting the option to buy stock. That’s an important distinction.

If your company grows and its share price climbs, that fixed price starts to look like a discount. That’s the upside.

ISO = A contract to buy company stock later at a fixed price, with potential tax perks.

And because ISOs are only available to full-time employees (not contractors or advisors), they come with an additional benefit: favorable tax treatment—if you play your cards right.

What makes ISO stock valuable?

Two things:

1. The company grows
2. You exercise and hold long enough to meet tax-holding periods (usually, at least 2 years from grant + 1 year from exercise)

If your company stays flat or exits below your strike price, your options may not be worth exercising. If it grows 10x, your ISO shares could become one of the most valuable parts of your compensation, especially if you get the long-term capital gains treatment.

But you need to:

• Stay long enough to vest
• Have the cash to exercise
• Take a risk with Alternative Minimum Tax rules
• Wait until liquidity (IPO, acquisition, or secondary sale)

Use Prospect to see the ROI of exercising your options today 

The difference between ISO stock and other options

ISOs aren’t the only kind of option out there. But they’re the only ones the IRS treats with preferential tax treatment, if certain rules are met.

Here’s how ISOs compare to non-qualified stock options (NSOs): the big win with ISOs? If you hold onto the shares long enough, you might only pay long-term capital gains tax on the profits. That’s the golden path.

Let Prospect do the heavy lifting, upload your grant doc and get your ISOs, NSOs, and RSUs decoded instantly.

What happens when you’re granted ISOs

Here’s what an ISO share looks like:

1. Grant: You’re given the right to buy, say, 25,000 shares at a strike price of $2 each. That strike price is the fair market value (FMV) on the day of the grant, by law.
2. Vesting: You can’t buy all 25,000 shares right away. You typically earn the right over time, like 25% after one year, then monthly over the next three years.
3. Exercise: Once vested, you can exercise—meaning you buy the shares at $2 each. If the company is now worth $10 per share, you’re buying at a discount.
4. Hold or Sell: You can either hang onto those shares or sell them. If you wait long enough (more on that in a sec), you might qualify for long-term capital gains tax instead of income tax.

So how does the tax work?

Here’s the part that trips people up.

If you exercise your ISOs and hold the stock, you might owe Alternative Minimum Tax (AMT) based on the “spread”—the difference between the strike price and the fair market value at the time of exercise.

Example:

• Strike price = $1
• FMV at exercise = $10
• You exercise 10,000 options = $90,000 “spread”

That $90,000 can count as income for AMT purposes. Yes, even though you haven’t sold the shares or made a cent in cash. AMTI (Alternative Minimum Taxable Income) is essentially your regular taxable income recalculated with certain preference items added back, including the ISO spread. You trigger AMT when the ISO spread pushes your AMTI above the 2025 exemption ($85,700 single / $133,300 married).

The upside? If you meet the holding period rules, you’ll only owe long-term capital gains on the profit when you finally sell.

Vesting: When your options become exercisable

Like most equity, ISO grants come with a vesting schedule. You typically earn your rights to exercise over 4 years, with a 1-year cliff.

Example:

• Year 1: 25% vests
• Months 13–48: 1/48th each month

You can’t exercise unvested ISOs. But after the first year, you can start deciding if/when to buy your vested shares.

Some companies offer early exercise, letting you buy ISO shares even before they vest. That can have tax advantages (starting the capital gains clock early), but you’re on the hook if you leave early or the company fails. Even a standard post-vesting exercise can reduce taxes if you still satisfy the 1-year and 2-year ISO clocks.

Liquidity: How ISO shares turn into cash

Having ISO stock options is one thing. Turning them into money is another.

You can usually only sell your shares when:

1. The company is acquired
2. The company goes public
3. There’s a secondary market transaction

Until then, your ISO shares might be worth a lot, on paper. But unrealised gains can’t pay your rent.

ISO grant pitfalls to avoid

Let’s run through a few common mistakes people make with ISO options:

Mistake 1: Waiting too long to exercise
You only have 90 days to exercise after leaving a company. Miss that window, and your ISOs convert to NSOs—or expire entirely. However, it’s worth checking your plan. Some companies extend the window up to 1 year or longer, but after 90 days they will convert to NSOs which are less tax advantaged.

Mistake 2: Ignoring AMT
Exercising a large number of ISOs can trigger a huge AMT bill, even if you don’t sell the shares. Model it out before you act.

Mistake 3: Overestimating liquidity
ISO shares aren’t always sellable. Know your company’s plans for IPO or acquisition, or whether secondaries are possible.

Mistake 4: Confusing grant with ownership
You don’t “have stock.” You have the option to buy stock. At your own expense. After vesting. And after understanding the tax hit.

Save this grant to Prospect & track key vesting and exercise dates.

What are incentive stock options worth?

The real value of ISO stock options depends on:

• Your strike price
• The company’s current (and future) valuation
• Whether you can meet the tax holding periods
• Your ability to exercise
• If/when the company has a liquidity event

You can’t check the value of your ISO shares in an app. But Prospect does the hard work for you so you CAN check the value of your shares that easily.

The bottom line with ISO options

ISOs are one of the most common (and most misunderstood) forms of startup equity. They can be a powerful wealth-building tool… or a tax headache.

To get the most from your incentive stock options:

• Understand what you’ve been granted
• Know your vesting schedule and expiration timelines
• Model out tax scenarios (especially AMT)
• Watch for liquidity events
• Plan ahead if you’re considering exercising

Because a job offer isn’t just about salary. It’s about upside. And understanding your ISO stock might just be the key to unlocking it.

At Prospect, we model what this equity could actually be worth. ISO stock options could be confusing and difficult to tackle. We can help you understand what you own.

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