Save time and reduce errors when issuing ISOs & NSOs

Monitoring and tracking various equity grants across shareholders becomes more complex as your company grows. Depending on how and when an option is issued and exercised, certain tax liabilities may apply to stakeholders. Your company may be liable to handle some of those withholdings.

Understanding the downstream impacts to your company and stakeholders when issuing Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) is critical. Pulley’s  new flow guides you through the process so you can issue equity with confidence —  reducing errors and saving time for you and your stakeholders.

We’ve updated the following flows so cap table admins can understand how and when the $100k rule is triggered as well as the tax implications that come with it: 

• Cap table views
• Option issuance
• Exercise flows

ISOs, NSOs and the $100k rule

There is a limit on how many ISOs can be issued to employees and exceeding the limit can cause compliance and tax issues for both your employees and your company.

The $100k rule is an IRS law stating that employees can only receive $100k worth of ISOs that become exercisable in a given calendar year; the exceeding amount being treated as NSOs.

Employees who receive ISOs do not pay taxes when they exercise the options, only when they sell the stock.

NSOs are not subject to the same favorable tax treatment as ISOs. For NSOs, the difference between the strike price and FMV at exercise (known as the “spread”) is treated as ordinary income. Furthermore, it is the company’s responsibility to withhold taxes on this spread on behalf of the stakeholder exercising NSOs.

Sounds complicated? Don’t worry.

Pulley automatically monitors and accounts for previous and newly issued grants that may cause your employee’s total value of ISOs to trigger the $100k rule. We’ve also added flexibility for cap table and stock plan admins to manage and customize employee tax withholdings for NSO spreads and withhold the appropriate tax amounts during exercise(the difference between strike price at grant and FMV at exercise time).

Our guided flows, including modals, tooltips, banners, and links to educational articles, ensure that both admins and employees issue and exercise options compliantly and understand the impact of their choices. 

Having an easy way to navigate the restrictions around issuing ISOs can aid you in determining whether a grant should be issued as early-exercisable, with a cliff after a certain date, or with a particular vesting schedule.

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Views

We’ve added new columns in the Drafts and Cap Table view to easily identify securities where an ISO/NSO split has occurred.

Issuing Options

When drafting new ISO grants, as soon as a cap table admin enters a grant amount that triggers a split, the option type will change from an ISO to a ISO/NSO split. The ISO value is calculated based on the current FMV multiplied by the number of options being granted.

Pulley automatically calculates the ISOs consumed by previously issued grants, and clearly displays the impact of previous grants on the existing grant within a table.

When adding a vesting schedule, the resulting table will automatically allot the number of options exercisable in a single calendar year based on the vesting dates, and extend the calculation across the vesting time period. Pulley will automatically include previous grants into the calculation, painting a whole picture of the stakeholder in question.

Admins can customize the tax withholding rate for options that go over the $100k rule limit (NSOs) to match withholding rates on the company’s HRIS system. Pulley offers an estimated tax withholding rate within the flow, based on IRS guidelines (22% for spreads under $1M, 37% for spreads equal to or above $1M), though admins can easily override that.

‍Stakeholder view

The stakeholder will be able to see the option grant they’ve been issued in their employee portal, as well as how other grants affect the ISO/NSO split status of an option grant. This is consistent with the experience of the admin during the issuance flow.

Option Detail View

Within the option detail view, both admins and stakeholders can view an option’s details, including the ISO/NSO split table showing the ISO/NSO breakdown across all grants for a given stakeholder.

New Exercise

New Exercise Requests show exercisable options split between ISOs & NSOs, as well as the non-exerciseable ISOs & NSOs.

‍Tax Withholding Information

Remember that the spread of NSOs is considered regular income for tax purposes, and companies are liable to withhold taxes to the best of their abilities. Pulley’s exercise flow differentiates between ISOs and NSOs and withholds taxes for the NSO spread only, ensuring both companies and stakeholders stay compliant.

Understanding ISO/NSO splits flow step

We add key information in a flexible view which shows the difference between ISOs and NSOs that are exercisable in any given calendar year.

Finally, stakeholders remit exercise payments, submit the exercise request, and wait for their company’s admin to approve it.

The process of issuing ISOs & NSOs via alternative cap table management software providers isn’t as easy or clear. In many cases you may need to be educated on the tax and legal implications of such a split in order to create one, which could lead to increased legal fees, or errors in issuance.Our ISO/NSO issuance workflows save you time, reduce errors, and help you stay compliant, all while helping guide employees through their acceptance and exercise flow, pre-empting questions.

Better views, and nuanced display of complex information

We’ve provided updates to our simple, clear option issuance and exercise workflows, so that cap table admins can issue options with confidence, and also help employees understand the impact of their grant acceptance and exercise.

It’s a feature that has big implications for a growing company with larger equity awards and more stakeholders. Pulley makes the process of issuing and exercising simple, clear, and transparent, so there is less need for education and cross-communication, saving everyone time and headaches.

If you’d like to learn more about how to issue equity, understand more about your cap table, or how Pulley helps you efficiently manage your equity as you scale, set time with a cap table expert.