Let's say I have a bunch of incentive stock options (ISOs) in a company that have vested but I have not exercised yet. If I were to leave the company, I have 90 days to exercise them with ISO tax treatment. But let's say I switch from a regular employee to contractor instead, and my stock option agreement specifies that my ISOs convert to non-qualified stock options (NSOs). Do I still have 90 days to exercise my vested options as ISOs, or do they immediately become NSOs?
FWIW, I was recently laid off, and I had 90 days to exercise my ISOs. As part of the severance package, the company offered a 3-year extension to the options, but they would immediately convert to NSOs, and I’d lose the 90-day window to exercise. So I had to come up with the cash to exercise shares before signing the extension agreement (they wouldn’t even just agree to apply the extension to a subset of shares).
It’s not clear to me how much of this was dictated by IRS regulations, and how much was just the company being lazy.