Incentive Stock Options (ISOs) have a $100k limit that prevents an optionee from treating more than $100,000 worth of exercisable stock options as ISOs in one calendar year. Stock options over this limit are classified as Non-Qualified Stock Options (NSOs). One main difference between them is their tax implications. ISOs typically result in a better tax situation for the individual, but they have several additional requirements that must be met to obtain the tax benefits. NSOs are typically less tax favorable since they are taxed upon exercise and can be taxed at a higher rate later on.

Pulley handles the calculations for ISO/NSO splits automatically.

If a grant qualifies as an ISO/NSO grant, you'll see it in the ISO/NSO split column on the Cap Table page, Options tab (if it is not visible, enable this column by clicking on the "Columns" button).
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The split will also be displayed inside the option grant page:
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Pulley calculates ISO/NSO splits by taking the fair market value (FMV) at the date of grant multiplied by the number of exercisable shares in a given tax year, and testing whether that number is is greater than $100k in value. If it is, then the grant then splits into an ISO/NSO grant.

Note that the test is whether stock options may be exercised in a given tax year, which is typically tied to vesting. If your stock options are "early exercisable" - meaning they can be exercised even when unvested - then the entire stock option grant is treated as exercisable in the year that it is granted to the stakeholder.

Example: This grant (OPT-1) has 500,000 options with a fair market value at the date of grant of $5 and vests 1/48th monthly. In the calendar year of 2020, the FMV at grant ($5) multiplied by the number of shares that vest (114,583) exceeds the $100k limit, therefore Pulley splits the grant as follows:

· ISO: 20,000 x $5 = $100,000

· NSO: 94,583 x $5 = $472,915

This ensures that the first $100k worth of options are classified as ISOs and the rest will be treated as NSOs.