What's the difference between ISOs and NSOs when you leave?

Short answer: ISOs and NSOs are both options, but they do not behave the same after you leave. ISOs can lose ISO status after a post-termination exercise window (often 90 days, plan-specific). NSOs are taxed as ordinary income on the spread at exercise. Strike, fair market value, and the window change the cash question. This is not tax advice.

ISO status after you leave

An ISO is a tax status, not a guarantee. While the option still qualifies, a later qualifying sale can be eligible for ISO treatment. That status is fragile once you leave.

Most plans give a post-termination exercise window. Ninety days is common. Some plans are shorter. Some companies extend the contractual window to years. The contract window and ISO status are not the same clock. ISO status can end when the tax rule says it ends, even if the option is still exercisable as an NSO after that. The plan and the tax rule both matter. A CPA who has the grant paperwork is the person for that. Not this page.

If you do not exercise inside the window the plan actually gives you, vested options can expire. Unvested options are typically forfeited when you leave, the same way unvested RSUs are. That forfeited unvested value is the walk-away cost in ordinary English: what you give up by leaving, not a bid and not cash. Vested options with a short window can add to what you actually lose if leaving would cause them to expire unexercised.

Death and disability sometimes get different clocks. Retirement language is company-specific. None of those exceptions are safe to assume from a blog post.

How NSOs are taxed at exercise

NSOs do not have ISO status to lose. At exercise, the spread is typically ordinary income. Spread means fair market value at exercise minus the strike, times the shares you exercise. Withholding can apply. What happens after that is a later sale, and a later tax question.

The strike does not change because you quit. The FMV can change. A private company often uses a 409A as FMV for option pricing. That 409A can be stale. It can also be a number you do not believe. Private paper is not cash. Discounting it is a judgment about liquidity, not a second 409A.

A large NSO spread on a short clock is a cash problem as much as a tax problem. You need the strike. You may need withholding. The window does not wait for a liquidity event.

Strike, FMV, and the window

Three inputs move the number more than the label ISO or NSO.

Strike. If FMV is at or below strike, the option is underwater. The spread is zero. Unvested underwater options usually add little to the forfeited remainder.

FMV. If FMV is well above strike, the spread is real on paper. Exercising still takes cash for the strike. For NSOs it can also take cash for tax on the spread. A short window can force that cash question on a deadline.

The window. A 90-day clock is a different decision than a multi-year clock. A long contractual window does not automatically preserve ISO status. Read the grant. Read the plan. This is not tax advice, legal advice, or financial advice.

If you want a private figure from the grants you actually hold, Worth Leaving is a private calculator. For the industry definition of the forfeited remainder, see What is walk-away cost?. For a private way to run the math, see How to calculate walk-away cost without anyone knowing.

FAQ

Do ISOs stay ISOs after I leave? Often only through a short post-termination exercise window, commonly 90 days. Plan-specific. After that, ISO status can be lost even if the option is still exercisable. Not tax advice.

How are NSOs taxed when I exercise? The spread at exercise is typically ordinary income. Strike, FMV, and the window change the cash you need. Not tax advice.

What happens to unvested options when I leave? They are typically forfeited. Underwater options have little or no spread to lose. Vested options can still expire if you miss the post-termination exercise window. The plan governs.