Incentive Stock Options (ISOs) are a type of stock option granted to employees, providing them with the opportunity to purchase company shares at a predetermined price, known as the exercise price. Unlike non-qualified stock options (NQSOs), ISOs offer preferential tax treatment. When employees exercise ISOs, they typically don't have to pay taxes at that time, but instead, they incur taxes when they sell the acquired stock. ISOs are often included in compensation packages offered by startups and other companies to motivate employees and encourage their long-term commitment. The value of ISOs can increase over time, allowing employees to potentially benefit from the growth in stock value. It's important to note that exercising ISOs is not mandatory, and employees have the flexibility to decide when to exercise them.

ISOs differ from NSOs in terms of tax implications. With NQSOs, employees are taxed both when they exercise the options and when they sell the stock, often resulting in higher taxes compared to ISOs. Additionally, companies may offer alternative equity compensation such as restricted stock awards (RSAs) or restricted stock units (RSUs), which do not require exercise but are granted as shares directly. To take advantage of the tax benefits associated with ISOs, employees must hold the acquired stock for at least one year after exercise and two years after the grant date. By meeting these requirements, employees may be eligible for lower capital gains tax rates on the increase in stock value. However, it's important to consult with a tax advisor, as the alternative minimum tax (AMT) may apply in certain cases. ISOs typically have a lifespan of 10 years, but companies may impose post-termination exercise (PTE) periods, limiting the time frame for employees to exercise options after leaving the company. If ISOs are not exercised within the specified period, they may lose their favorable tax treatment and be taxed like NQSOs.

Please note that the above summary is a concise and simplified overview of incentive stock options and their main features. For comprehensive and specific guidance regarding ISOs, it's recommended to consult with a qualified tax advisor or legal professional.