The following is not meant to be legal advice.
For attorneys working in stock administration, they may be checking the Form 4 of an officer or director and see that the options granted are split between Incentive Stock Options and Non-Qualified Options. How is the split made?
There is a limit for Incentive Stock Options. According to IRC Section 422(d), an employer may not grant an employee more than $100,000 in stock options that first become exercisable in any one year.
This means that according to this rule, a person granted 500,000 shares at $21.56 per share will need to use the following calculations in order to be correct:
Maximum aggregate fair market value: 156,248 shares * $2.56 per share = $399994.88
If the options are 25% exercisable after 1 year: $399994.88/4 = $99998.72.
This means 156,248 shares will be Incentive Stock Options, and the rest of the 500,000 shares will be Non-Qualified Stock Options.
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