Who is eligible for incentive stock options (ISO)?

Incentive stock options (ISOs) are specifically designed to provide tax-advantaged stock options to employees of a company, allowing them to purchase shares at a predetermined price. The eligibility criteria for ISOs are established under the U.S. Internal Revenue Code. To qualify, the recipient must be an employee of the company granting the options at the time the options are granted.

This structure incentivizes employees because it aligns their interests with those of shareholders, encouraging them to contribute to the company’s success. Importantly, ISOs cannot be granted to non-employees, including consultants or outside board members, as this would violate the specific regulatory framework that governs these types of stock options.

While some might mistakenly believe that consultants or executives have eligibility due to their significant roles, the tax benefits and regulatory compliance associated with ISOs limit this advantage solely to those in an employee relationship with the firm.