Equity planning

Stock options after executive severance: the 90-day decision.

When your employment ends, your incentive stock options don't automatically disappear — but they don't stay ISOs forever either. Under IRC §422, an ISO must be exercised within 3 months of your last day of employment to retain its favorable tax treatment. Miss that window and the options either convert to nonqualified stock options (NQSOs) with less favorable tax treatment, or expire entirely depending on plan rules. On top of that, NQSOs have their own exercise and expiration schedules. Both run on clocks that most executives don't start tracking until they're already running out of time.

ISO post-termination: what the tax code says

IRC §422(a)(2) requires that the person exercising an ISO was an employee of the granting company (or a parent or subsidiary) at all times during the period beginning at the grant date and ending no more than 3 months before the exercise date. In plain terms: you must exercise within 3 months of separation to keep ISO treatment.

Two exceptions apply:

• Disability: If you separate because of permanent and total disability (as defined under IRC §22(e)(3)), the window extends from 3 months to 12 months per IRC §422(c)(6).
• Death: Your estate or beneficiaries may exercise under plan rules. The 3-month employment requirement does not apply to post-death exercises under IRC §421(c)(2). Check the grant agreement and plan document for the specific procedure.

What happens to ISOs not exercised in time is plan-specific. Many plans allow a conversion to NQSO status so the option doesn't simply disappear — but some plans require exercise within the post-termination window or the grant terminates. Read your plan document before assuming conversion happens automatically.

ISO vs. NQSO: tax treatment side by side

The ISO exercise decision: what to model

Step 1: identify the actual deadline

Pull your grant agreements and the plan document. Confirm: (1) your termination date, (2) whether the plan allows conversion to NQSO or terminates at 90 days, (3) the expiration date of any converted NQSO (many plans cap the original 10-year term, so conversion doesn't automatically mean 10 more years), and (4) whether any grants were already NQSOs — plan terms vary and not all executive grants are ISOs.

Step 2: model the AMT impact before exercising

Exercising ISOs doesn't trigger ordinary income — but it does increase Alternative Minimum Taxable Income (AMTI) by the spread. For 2026, the AMT exemption is $90,100 for single filers and $140,200 for married filing jointly. The exemption phases out by $0.25 for every $1 of AMTI above $500,000 (single) or $1,000,000 (MFJ).³ The AMT rate is 26% below $244,500 of excess AMTI and 28% above.

Step 3: evaluate a same-day sale (disqualifying disposition)

Exercising and immediately selling is a "disqualifying disposition" — you pay ordinary income tax on the spread, and no AMT applies to that exercise. For executives with large spreads at high income brackets, the all-in effective rate on a disqualifying disposition (37% federal + state + Medicare) often compares favorably with an ISO exercise-and-hold strategy that carries AMT risk. Whether LTCG treatment is worth the exposure depends on your view of the stock and your ability to absorb the AMT before the qualifying disposition clock clears.

Step 4: check for cashless exercise or net exercise

If you have NQSOs (or ISOs you plan to immediately sell), check whether the plan allows net settlement or broker-assisted cashless exercise. This matters if you don't have enough liquid capital to exercise all grants plus pay the resulting tax before selling.

1. Pull the plan document — confirm which grants are ISOs and which are NQSOs, and the exact post-termination exercise periods for each.
2. Map every deadline — ISO 3-month window, converted NQSO expiration, any accelerated vesting provisions triggered by termination.
3. Run an AMT projection — for each ISO tranche, calculate the spread and the projected AMT liability if you exercise and hold.
4. Model exercise-and-hold vs. exercise-and-sell — compare effective rates and liquidity requirements for each path.
5. Coordinate with your CPA before exercising — AMT credits generated in the year of exercise may carry forward, but the timing of that credit utilization matters for overall planning.

NQSO planning after termination

NQSOs don't have the ISO post-termination constraint — but they do expire, and most plans set exercise deadlines (often 30–90 days post-termination, with some plans allowing the full remaining option term). Confirm the specific deadline from your grant agreement.

Tax treatment is straightforward: the spread at exercise is ordinary income, reported by your former employer on Form W-2 (or a 1099 if required). Federal withholding may apply at the supplemental rate (22%), which can underestimate actual liability if you're in the 32–37% bracket. Budget for the difference. Subsequent appreciation after exercise is capital gain — short-term or long-term depending on whether you hold the shares for more than one year.

One planning consideration: if you're in a low-income year post-severance — taking time off, consulting at reduced rate, or in the 0% LTCG bracket window — exercising NQSOs in that year may make sense even without a near-term sale, since the spread income lands at a lower marginal rate.

Change-in-control and option treatment

Acquisitions override the standard post-termination framework. The merger agreement and plan documents govern what happens, and outcomes vary significantly:

• Cashout: Options are cashed out at the merger consideration price minus the exercise price. For NQSOs, the cash spread is ordinary income. For ISOs, a cashout is a disqualifying disposition if selling before holding periods — ordinary income on the spread at settlement.
• Assumption or replacement: Acquirer assumes your options or substitutes equivalent awards. Your post-termination window depends on the acquiring company's plan terms, not your former employer's.
• Double-trigger acceleration: If your plan includes double-trigger acceleration, your unvested options may vest on termination following a change in control. The vested options then enter the standard post-termination exercise window under IRC §422.

See the change-in-control equity guide for the broader picture, including RSU and deferred compensation treatment in acquisitions.

Negotiating option terms in the severance agreement

Many executives don't realize that some plan documents allow extended post-termination exercise windows by board or committee exception — sometimes up to the full remaining term of the option. This provision must be requested during severance negotiation, not after termination. Once you sign and separate, the plan terms typically become fixed. If you have deep in-the-money ISOs or NQSOs that you'd prefer to hold rather than immediately exercise, ask employment counsel to include extended exercise window language in the separation agreement before signing.

Note: extending the exercise period of an ISO beyond 3 months after termination converts it to a NQSO as a matter of law — the extended option can no longer qualify as an ISO. The tradeoff (NQSO treatment vs. losing optionality) is still often worth exploring depending on spread size, stock outlook, and tax situation.