Draft

Draft an ISO grant memo with the math done

Produces a grant memo for an incentive stock option award with the $100,000 first-exercisable test worked out, AMT shown as a number, and drop-in offer-letter language.

About 12 minintermediateTransactional, Tax

Your prompt5,228 characters

Still to fill in: Grantee, Grant terms, Plan terms

RoleYou are a transactional partner who issues equity grants for a living and has cleaned up other people's ISO mistakes. You run the $100,000 arithmetic before you write a sentence, you never let an NSO rule wander into an ISO memo, and you explain the AMT exposure with an actual number rather than a warning label.What I needDraft the grant memo for Grantee on the terms below, written for The grantee: plain English, no code sections in the body, accounting for Tax residence and state of incorporation.InputsGrantee: Grantee Grant terms: Grant terms Plan terms: Plan terms Tax residence and state of incorporation: Tax residence and state of incorporation Written for: The grantee: plain English, no code sections in the bodyHow to work this1. Open with a snapshot table: grantee, shares, strike and its valuation source, grant date, expiration, vesting, acceleration, plan, type. Any field you cannot fill from the inputs gets marked "not supplied," never guessed. 2. Run the § 422(d) $100,000 test. For each calendar year, multiply the shares first becoming exercisable in that year by the FMV on the grant date, and show the arithmetic. If any year exceeds $100,000, identify which shares fall out of ISO treatment and become NSOs. 3. Check each § 422 condition against the inputs: stockholder-approved plan, employee status at grant, strike at or above FMV, ten-year term, and the 10%-owner variant. Say plainly which you cannot verify from what I gave you. 4. Model AMT with a number, not a caution. Pick a plausible future FMV, compute the spread on a realistic exercise quantity, and show the AMT income figure. 5. State both holding periods and what breaking either one costs: ordinary income on the spread, W-2 reporting by the company, no withholding obligation on the ISO exercise itself. 6. Compare the plan's post-termination window against the three-month ISO rule (twelve months for disability). Where they diverge, say the option stays exercisable but as an NSO. 7. Write the offer-letter paragraph at the register The grantee: plain English, no code sections in the body calls for, and note separately that acceleration must appear in the grant agreement, not only in the offer letter.Close with these four sections, every time, without being askedAssumptions I made. Every factual and tax assumption behind the memo: that the 409A is current, that the grantee is an employee rather than a contractor, that the plan is § 422-compliant, which state's tax rules apply. Mark each [verify] or [safe]. Where this is weakest. The two or three points most likely to be wrong or challenged: a stale valuation, an unverified plan provision, an AMT model built on a guessed FMV. Name the section, not "the analysis." What only you can decide. Present each as options with tradeoffs. At minimum: whether to grant the full amount as an ISO and accept that some tranches spill into NSO treatment (simpler paperwork, worse tax outcome for the grantee) or split the award into a stated ISO piece and a stated NSO piece up front (cleaner records, more explaining at the offer stage); and whether to disclose the AMT exposure in the offer package (builds trust, occasionally spooks a candidate) or hold it for the grant-agreement conversation. What would make this materially better. The specific document or fact that would most improve the next pass: the plan document itself, the 409A report date, the grantee's other outstanding grants, the board's approval date. Rank by impact.Output formatSnapshot table; the $100,000 test with year-by-year math; a § 422 checklist flagging what you could not verify; plain-English tax notes with the AMT number worked; exercise mechanics; a post-termination window table with the ISO-status consequence in each row; drop-in offer-letter paragraph; documents to issue. Then the four closing sections.Never do this- If the memo would read identically for a 5,000-share grant at a $0.05 strike, it is too generic. The numbers in the inputs must drive every section. - No hedging filler. Cut "arguably," "generally speaking," and "it depends." Do not tell me to consult a tax advisor. I am the one advising. - Every Code section, revenue ruling, or regulation you cite must come from my inputs or be marked [UNVERIFIED - confirm before the memo goes out]. Never invent a section number, a threshold, or a holding-period rule. - Where you do not know whether the plan is § 422-compliant, whether the 409A is current, or how Tax residence and state of incorporation taxes the spread, say you do not know. Do not smooth over the gap with fluent prose. - Do not pad. If all shares qualify as ISOs and no year comes near the cap, say so in one line. Length is not value.Before you answer- Did I show the $100,000 arithmetic year by year, or only assert the result? - Did I quote a real AMT number, or leave a generic warning? - Is any NSO rule sitting in a paragraph labeled ISO? - Would this memo be useless for a different grant? It should be. - Is any Code section or threshold stated without a source in my inputs?

Adds driver's-seat tunes: options instead of answers, questions before work, every citation flagged. Your values come with it.

Pressure-test it

Makes the AI switch hats and attack its own answer.

The candidate will forward this memo to her personal CPA before she signs anything, and that CPA has seen three clients get wrecked by an AMT bill on an illiquid stock. She reads every equity package looking for the sentence the company left out. Answer as the CPA. Write the three questions she sends back, the answer we should have ready for each, and a worked AMT example at the exercise quantity she will actually recommend. Then tell me which of her questions exposes a real gap in the memo rather than a talking point.

Go deeper

Pushes the work further once the basics are right.

Recruiting cannot send this memo, and the candidate would not read it anyway. Write the one-page equity FAQ recruiting can attach to the offer: what vesting actually means, ISO versus NSO in two sentences, what happens on departure and how long the window really is, why the strike price is what it is, and the one thing the candidate should ask their own tax advisor. Plain English, no Code sections.

Before you run it

What to gather first

The current 409A valuation or board FMV determination and its date
The equity plan document: permitted exercise methods and post-termination windows
Whether the grantee is a new hire, a promotion, or a refresh on top of an existing grant
Whether the grantee owns 10% or more of the company's voting stock
The company's acceleration policy and whether the board has already approved it

Watch for

The $100,000 limit is measured on FMV at grant of shares first becoming exercisable in a calendar year. Acceleration, an early-exercise feature, or a second grant in the same year can push a previously compliant grant over the cap. Recompute whenever any of those happen.
Section 409A requires the strike to be at or above FMV on the grant date. A stale 409A, or a grant dated before the board actually approved it, creates penalty exposure for the grantee, not the company.
ISO status is lost if the option is exercised more than three months after termination (twelve for disability). Plans routinely give a longer window, which means the option survives as an NSO. Say so explicitly or the grantee will be surprised.
State tax treatment of the AMT preference item and of disqualifying dispositions varies. Confirm the grantee's state of residence at exercise, not at grant.
Net exercise and share withholding generally disqualify the netted shares from ISO treatment. Confirm what the plan permits before describing exercise methods.

What comes back

A snapshot table; the $100,000 first-exercisable test with year-by-year math; a § 422 condition checklist flagging what could not be verified; plain-English tax notes with a worked AMT number; exercise mechanics; a post-termination window table showing the ISO-status consequence in each row; drop-in offer-letter language; a documents-to-issue list; then the four closing sections.

See an example of what you’ll get

Grant snapshot | Item | Value | |---|---| | Grantee | Marcus Lin, VP Engineering (new hire) | | Shares | 120,000 | | Strike | $1.85 (September 2024 409A) | | Grant date | Board approval; not yet set | | Expiration | 10 years from grant | | Vesting | 4 years, 1-year cliff (25%), then monthly | | Acceleration | Double-trigger: change of control plus termination without cause within 12 months | | Plan | Northwind Robotics 2022 EIP | | Type | ISO to the extent eligible under § 422 | $100,000 first-exercisable test. Year 1 (cliff): 30,000 × $1.85 = $55,500. Years 2–4: 30,000 × $1.85 = $55,500 each. No year exceeds $100,000, so all 120,000 shares qualify as ISOs, *provided the grant date FMV is still $1.85*. If the board sets a new 409A above $3.33 before the grant date, Year 1 alone breaches the cap and the excess becomes NSO. § 422 checklist. Stockholder-approved plan: satisfied (3/2022) [verify against the plan's ten-year adoption window, which closes 3/2032]. Employee on grant date: satisfied. Strike ≥ FMV: satisfied as of the September 2024 409A [verify currency]. Ten-year term: satisfied. 10%-owner variant: not applicable per your input. AMT, with a number. Suppose Marcus exercises his first 30,000 shares after the cliff, when the 409A has moved to $4.00. Spread = ($4.00 − $1.85) × 30,000 = $64,500 of AMT income in that year, on stock he cannot sell. At a 26% tentative minimum rate the exposure is roughly $16,800 of cash tax on paper gain. California imposes its own AMT on top. This is the number that decides whether he exercises early or waits. Post-termination windows | Trigger | Plan window | ISO status | |---|---|---| | Voluntary or without cause | 90 days | ISO throughout | | For cause | Forfeit | n/a | | Disability | 12 months | ISO for 12 months | | Death | 12 months | ISO preserved | --- Assumptions I made. The September 2024 409A is still the operative valuation on the grant date [verify - it is the single most consequential assumption here]. Marcus is a W-2 employee from day one, not a contractor for a transition period [verify with HR]. The 2022 EIP is § 422-compliant [verify - I have your summary, not the plan]. Where this is weakest. The entire $100,000 analysis rests on a $1.85 strike. If the board refreshes the 409A before granting, Year 1 breaches the cap and the memo's conclusion flips. The AMT model uses a $4.00 future FMV I invented for illustration. What only you can decide. Grant all 120,000 as an ISO and let any spillover convert automatically (one document, one conversation, but the grantee learns about the NSO piece from a tax form) or split the award now into a stated ISO tranche and a stated NSO tranche (cleaner records and cleaner W-2 handling, but you have to explain two instruments at the offer stage). Also yours: whether the AMT example goes in the offer package or waits for the grant-agreement call. What would make this materially better. (1) The 2022 EIP document: it resolves the § 422 compliance and net-exercise questions in one read. (2) The date and value of the next scheduled 409A. (3) Confirmation of the intended board approval date, which sets the grant date and therefore the strike.

Why this prompt is built the way it is

## Framework 1. **Snapshot first.** Grantee, shares, strike, grant date, expiration, vesting, acceleration, plan, and grant type in a table at the top. If a field is unknown, mark it, do not guess it. 2. **Run the $100,000 test.** § 422(d) caps ISO treatment at $100,000 of stock (valued at FMV on the grant date) first becoming exercisable in any calendar year. Show the arithmetic year by year; excess shares are NSOs and must be identified. 3. **Check every § 422 condition.** Shareholder-approved plan, employee on the grant date, strike at or above FMV, ten-year maximum term, and the 10%-owner variant (110% of FMV, five-year term). Name the ones you cannot verify from the inputs. 4. **AMT gets a number.** The spread at exercise is an AMT preference item even when regular tax is zero. Model it against a plausible future FMV. 5. **Two holding periods, one trap.** Two years from grant and one year from exercise for full capital-gain treatment; a sale inside either window is a disqualifying disposition: ordinary income on the spread, W-2 reporting, no withholding on the ISO exercise itself. 6. **Post-termination windows are where ISO status dies.** The plan's exercise window and the three-month ISO rule (twelve months for disability) frequently diverge. Say when the option converts to an NSO. 7. **Acceleration lives in the grant agreement.** An offer letter promising acceleration that the grant agreement does not document is a dispute waiting to happen.