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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?

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  • What does your contract say? – Kevin Sep 17 '18 at 18:30
  • @Kevin It's not totally clear to me because does becoming a consultant constitute "termination of employment"? – Craig W Sep 17 '18 at 20:05
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    I'm neither a lawyer nor an accountant, but I'd guess so. Either way, AFAIK there's nothing on the books about this so it's between you, your employer, and (if you can't come to an agreement) possibly a lawyer or two. – Kevin Sep 17 '18 at 21:02
  • Do you really want to risk getting this wrong? Why not ask someone in your company HR department? A member here might have had an identical experience, and give you their excellent advice, but your company handles it differently. That would be 'bad'. – JTP - Apologise to Monica Sep 23 '18 at 13:10
  • @JoeTaxpayer I thought somebody might have a definitive answer from the IRS. I don't think it's up to the company because there are requirements for stock options to be treated as ISOs. – Craig W Sep 24 '18 at 13:36
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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.

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