What is a requirement for the term of an ISO?

The correct answer indicates that an Incentive Stock Option (ISO) must have a term that is limited to 10 years. This aligns with regulations set by the Internal Revenue Code, which governs the lifespan of ISOs. Specifically, the rules state that the options must be exercised within 10 years from the grant date for the employee to receive favorable tax treatment associated with ISOs.

Options that suggest an unlimited duration or a limitation to 5 years are inconsistent with the regulatory framework governing ISOs. Additionally, the option regarding the exercise within 2 years pertains to a different aspect of ISOs, specifically in relation to the holding period required to benefit from preferential tax treatment upon sale of the stock acquired through the exercise of the ISO, rather than the term of the option itself. Thus, the 10-year limit is critical for maintaining the tax-advantaged status of these stock options.