Employee equity
The ISO $100,000 limit, with a worked grant
Understand the US incentive stock option annual limit, how first-exercisable value is measured by calendar year, and what happens to the excess.
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A limit on value, measured by year
Under US tax law, incentive stock options are subject to an annual limit: to the extent the aggregate fair market value of stock for which ISOs are first exercisable by an individual during a calendar year exceeds $100,000, the excess options are treated as nonstatutory options. The value is measured at the grant date, and the year is the year the options first become exercisable, not the year they were granted.
The limit therefore depends on the vesting schedule, not only on the size of the grant. The IRS explains the basic ISO and NSO distinction in Topic 427; the plan documents and the employer’s tax advisers determine how the rule applies to a particular grant.
Work through one grant
Assume a fair market value of $4.00 per share on the grant date and an ISO for 100,000 shares granted January 1, 2025, vesting monthly over four years with a one-year cliff. The grant-date value of the whole award is $400,000. Spread across the years in which the options first become exercisable, it looks like this.
| Year | Shares first exercisable | Value at $4.00 | Against the $100,000 limit |
|---|---|---|---|
| 2025 | 0 | $0 | Nothing vests before the cliff, so nothing is first exercisable. |
| 2026 | 47,916 | $191,664 | Over: the cliff releases 25,000 shares and eleven monthly tranches follow. |
| 2027 | 25,000 | $100,000 | Exactly at the limit. |
| 2028 | 25,000 | $100,000 | Exactly at the limit. |
| 2029 | 2,084 | $8,336 | Within the limit. |
Only 2026 exceeds $100,000, and only by the amount above it. The excess portion is treated as a nonstatutory option; the rest of the grant is unaffected. A holder’s other ISOs from the same employer count toward the same annual measurement, so a grant that is inside the limit on its own can push an earlier grant’s year over it.
Early exercise moves the whole grant into one year
A grant that permits early exercise is exercisable in full from the day it is granted, which is what the provision means. The entire grant-date value therefore becomes first exercisable in the grant year. The same 100,000-share grant would be measured as $400,000 in 2025, well above the limit, even though the shares remain subject to repurchase as they vest.
This is one of the trade-offs of early exercise rather than a defect in it. See Early exercise, reverse vesting, and 83(b).
Read the app’s check for what it is
Cap Table measures each holder’s ISOs by the year their shares first become exercisable, valued at the 409A in force on the grant date, and flags the years that run past $100,000 along with the grants that contribute to them. Where no recorded valuation covers a grant date, the strike stands in and the warning says so, because the strike is the closest figure on record and cannot understate the basis.
The check is a review prompt built from recorded data. It does not reclassify an option, split a grant into ISO and NSO portions, or determine tax treatment. Resolve a flagged year with the plan administrator and the company’s advisers, and keep the grant documents attached to the record.