Drip of the Week: The ISO Window Many Employees (and Advisors) Miss

Welcome to the Drip of the Week – your quick hit on companies we like, what’s changing across the Unicorn economy, and how those changes impact employees and founders of the companies shaping our future.

Spotlight: Incentive Stock Options (ISOs)

ISOs are one of the most powerful and misunderstood forms of equity compensation. When used correctly, they can materially reduce taxes and preserve long-term upside. When mishandled, they often convert quietly into a far less attractive outcome.

The most overlooked advantage is that employees can exercise ISOs today and defer federal taxes for up to approximately 15 months, without selling a single share.

What Makes ISOs Different and Where People Go Wrong:

• Exercise now, pay later. When ISOs are exercised and held, no regular income tax is due at exercise. Any potential alternative minimum tax (AMT) exposure isn’t settled until the following tax year, meaning employees can often exercise in January and not write a check until April of the following year.
• Capital gains optionality. If holding periods are met, two years from grant and one year from exercise, gains may qualify for long-term capital gains instead of ordinary income, a spread that can exceed 20% in high-tax states.
• Liquidity without forced selling. The challenge is rarely whether to exercise, it’s how to fund the strike price and any future AMT exposure without selling shares early.

The Biggest ISO Mistake We See: 

Once an employee leaves their company, ISOs typically have a 90-day exercise window. Miss it, and the options often convert to (non-qualified stock options) NSOs, triggering ordinary income tax at exercise and permanently eliminating ISO benefits.

That conversion is often accidental, irreversible, and extremely costly.

Why It Matters

For employees with meaningful equity, poor ISO timing can result in:

• Paying ordinary income tax instead of capital gains tax
• Losing flexibility around AMT planning
• Selling shares early to fund exercises
• Giving up qualified small business stock (QSBS) eligibility before it even starts
• Compressing years of upside into a single taxable event

In many cases, the tax difference between “exercise smart” and “exercise late” can exceed the cash required to exercise the options.

What To Do

If you know or work with clients who:

• Hold ISOs at private tech companies
• Are considering leaving their employer
• Are approaching the 90-day post-termination window
• Want to exercise without selling shares
• Are navigating AMT, QSBS, or long-term holding strategies

This is the moment to slow down and model the full picture.

Liquid Stock works with employees and their advisors to evaluate ISO exercise strategies, fund exercises and tax exposure without forced sales, and preserve long-term ownership through structured solutions.

If your clients have ISOs, or are about to lose them, we’re happy to walk through the numbers.