Laid Off With 90 Days to Exercise $500k of ISOs

Nadia was a senior engineer at Helio Bioinformatics when the company laid off 28% of staff in March 2025. Her severance was 16 weeks of base pay. Her equity position: 42,000 ISOs at a $1.20 strike, all vested. The current 409A was $13.50, giving her a spread of $12.30 per share and a total intrinsic position of $516,600. Helio’s plan provided the standard 90-day post-termination exercise window under IRC §422(a)(3). After 90 days, unexercised ISOs automatically convert to NSOs (losing ISO treatment) or lapse entirely depending on plan terms. She had 90 days to decide how many to exercise, while paying for the strike and the AMT from her own pocket.

Situation

Her financial picture at layoff:

Severance: 16 weeks × $6,250/week = $100,000 pre-tax; $64,000 after-tax.
Savings: $85,000 in liquid brokerage.
401(k): $220,000 (not accessible without 10% penalty and ordinary rates).
Debt: $4,300 credit card balance, no mortgage (she rented).
Unemployment insurance: eligible after severance exhausts, max $450/week California.

ISO exercise math:

42,000 ISOs at $1.20 strike.
Cost to exercise all: 42,000 × $1.20 = $50,400.
Spread per share: $13.50 - $1.20 = $12.30.
Total AMT preference: 42,000 × $12.30 = $516,600.

Her 2025 projected income before any exercise:

Pre-layoff wages Jan-March: $68,000.
Severance (paid as wage continuation through July): $100,000.
Unemployment Aug-Dec: ~$11,000.
Total 2025 wages: ~$179,000.

Regular federal tax on $179k (single): ~$33,000. AMT exemption 2025 single: $88,100. AMT income before ISO: $179k (federal AMT basically equals regular AMT income for her situation). Tentative AMT on $179k: ~$32,000 (below regular tax, no AMT owed).

If she exercises all 42,000 ISOs:

AMT preference added: $516,600.
AMT income: $695,600.
AMT exemption phaseout: income above $626,350 (single) phases out exemption at 25 cents per dollar. She is $69,250 above, phasing out $17,300 of her $88,100 exemption.
Remaining exemption: $70,800.
AMT base: $695,600 - $70,800 = $624,800.
AMT at 26% on first $232k, 28% above: $232,000 × 26% + $392,800 × 28% = $60,320 + $109,984 = $170,304.
Regular tax: $33,000.
Additional AMT owed: $137,300.

Total cash cost to exercise all 42,000 ISOs: $50,400 strike + $137,300 AMT = $187,700.

She did not have $188,000 in cash. She had $85k in brokerage plus severance inflows.

What we modeled

Exercise size	Strike cost	AMT cost	Total cash out
0	$0	$0	$0
10,000 shares	$12,000	$0 (within exemption)	$12,000
18,000 shares	$21,600	$0 (AMT-neutral)	$21,600
25,000 shares	$30,000	$31,100	$61,100
35,000 shares	$42,000	$94,000	$136,000
42,000 (all)	$50,400	$137,300	$187,700

The AMT-neutral threshold was approximately 18,000 shares, at which her AMT equaled her regular tax.

Additional consideration: Helio’s liquidity. Helio was pre-IPO with a tender offer conducted in 2024 at $11 per share. Before her termination, her ISO was theoretically valuable. After termination, she was no longer eligible for future tenders unless Helio made an exception. Her exercised shares would be illiquid private stock with no clear path to sale.

Risk analysis:

Probability Helio succeeds to a liquidity event: she estimated 55-65% based on her knowledge.
Probability of liquidity at $13.50+ per share: ~45%.
Probability of liquidity below $1.20 strike (shares worthless): ~15-20%.
Probability Helio fails entirely: ~10-15%.

Expected value of exercise per share: approximately 45% × $12.30 + 20% × $4.00 (liquidity below current 409A but above strike) + 20% × $0 - exercise risk-premium adjustment. Roughly $5-7 of expected value per share after risk-adjusting.

What she did

She exercised 18,000 shares (AMT-neutral) in April 2025 at a cost of $21,600. This preserved her entire AMT exemption for the year, started the §422 and §1202 clocks, and gave her meaningful exposure to Helio upside if they succeeded.

She did not exercise the remaining 24,000 ISOs. The AMT cost of exercising those was $137,300, which would have consumed most of her liquid savings in a year when she was unemployed. She accepted losing those ISOs after the 90-day window expired.

She also negotiated with Helio to extend her post-termination exercise window. Helio’s standard plan was 90 days, but her severance agreement included a provision she had not noticed: ISOs could be extended to 12 months if she signed a non-compete. She consulted an employment lawyer on the non-compete terms, determined they were narrow enough to be acceptable, and signed. The extension converted her ISOs to NSOs after 90 days (because §422 requires exercise within 90 days to preserve ISO treatment), but the extended window gave her an additional 9 months to exercise at NSO treatment.

Under NSO treatment, exercising triggers ordinary income at exercise (not AMT preference). The spread becomes W-2 income immediately, taxed at her then-marginal bracket. At her 2025 lower-income profile, her marginal bracket on additional $200k of NSO exercise would be approximately 24-32% federal plus California 9.3%. She could exercise more NSOs in 2025 at a net tax rate far lower than the AMT effective rate.

She exercised an additional 15,000 shares as NSOs in November 2025 at $1.20 strike. Spread: $12.30. W-2 ordinary income added: $184,500. Federal tax at marginal 24-32% plus California 9.3% on the spread: approximately $65,000.

Total 2025 exercises:

18,000 ISO shares: $21,600 strike, $0 AMT.
15,000 NSO shares: $18,000 strike, $65,000 ordinary tax.
Combined: 33,000 shares exercised, $104,600 of cash cost.

She preserved 9,000 shares unexercised, to be addressed in 2026 based on Helio’s progress.

What she wishes she had done differently

She did not know about the non-compete extension until 40 days into her 90-day window. She had been reading the severance agreement for 30 minutes at a time each morning during job search. An earlier read-through with an attorney would have surfaced the extension option in week 1, giving her flexibility to plan NSO exercises across a longer window.

She also did not early-exercise in 2022 when she first joined Helio. At that time, the 409A was $2.40 and the spread was $1.20. 42,000 shares at $1.20 spread = $50,400 of AMT preference, well within the AMT exemption. Cost to exercise: $50,400 strike + $0 AMT = $50,400. In 2022 she had $110k of savings and could have done this. Early exercise would have:

Eliminated the 2025 AMT pressure entirely.
Started her §422 clock immediately.
Started her §1202 clock immediately.
Preserved full ownership of all 42,000 shares.

The cost would have been tying up $50,400 in illiquid Helio stock for 3 years. At 5% opportunity cost, that is $7,900 of forgone interest. Small price for the flexibility.

Third regret: she did not ask about severance negotiation on the ISO window at layoff. Helio’s default was 90 days, but severance-negotiated extensions were available. Other laid-off engineers at Helio had successfully negotiated 12-month ISO extensions without the non-compete requirement. She accepted the 90-day default initially and only discovered the extension option weeks later.

Frequently asked

What is the post-termination ISO exercise window?

IRC §422(a)(3) requires that ISOs be exercised within 3 months (90 days) of termination of employment to retain ISO treatment. If not exercised within this window, they lose ISO treatment. Plans may extend the exercise deadline beyond 90 days, but the extension period treats the options as NSOs.

What is the difference between ISO and NSO tax treatment?

ISO: no ordinary income at exercise; AMT preference on the spread; capital gains on sale (if §422 holding met).

NSO: ordinary income at exercise equal to the spread; capital gains on any post-exercise appreciation.

Can I negotiate a longer exercise window at termination?

Sometimes yes. Post-termination extensions are increasingly common in severance agreements, especially for senior employees or layoff situations. Extensions typically convert ISOs to NSOs after the 90-day mark.

Should I exercise before I know if the company will succeed?

Depends on your financial capacity, the cost, and your read on the company. Early exercise has the best tax treatment but highest risk. Late exercise (at high FMV) has high AMT cost but better company visibility. AMT-neutral exercises are almost always worth doing to preserve optionality at minimal cost.

What happens to unexercised ISOs at expiration?

They lapse worthless. No tax consequence. No future claim on the shares.

Composite scenario drawn from common patterns in our advisor network's casework. Names, companies, and exact numbers are illustrative. Not tax, legal, or investment advice.