[elbrodeur]

Congratulations! Vest in peace.

Now, it's been a while since I've had to think about any of this, but I'll try to answer your questions:

ISOs (Incentive Stock Options) are options that do not carry a tax burden. Meaning, if you exercise your options (purchase them at the strike price) you do not have to pay taxes on any profits you make on them.

Common stock is called common to differentiate it from preferred stock which is typically given to investors, founders or to purchase board members. The primary difference being is if your company goes under, those guys get taken care of first.

Vesting periods usually work like this:

You have a cliff -- which is, essentially, a time gate that says "if you leave before date x, you get no shares. after date x, you are able to purchase all of the shares you earned prior to date x (in your case probably 12/60ths of total allotment) and earn the right to purchase an additional 1/60th of your options every month thereafter."

What happens if you are acquired? There are several possibilities depending on the type of acquisition.

1) You might be given a new grant

2) You might be given cash in exchange for vested shares and a new grant based on the pool of the parent company

Going public I'm less familiar with, but I'm under the impression that you can unload any stock you own onto the market barring any contractual agreements (CEOs and significant shareholders, if I recall correctly, are disallowed from divesting over a certain amount per month so as not to affect valuation).

[js2]

> Meaning, if you exercise your options (purchase them at the strike price) you do not have to pay taxes on any profits you make on them.

Huh? You absolutely have to pay taxes on any profit you make when you sell the shares. In addition, you may also need to pay taxes at the time of exercise on the difference between the strike price and the fair market value, in the form of AMT.

http://fairmark.com/execcomp/isoexer.htm

[elbrodeur]

Sorry, that was very poorly worded.

From your link, this is the point I was trying to get across:

"For purposes of the regular income tax, the exercise of an incentive stock option is a non-event. There is no tax — in fact, nothing to report on your tax return — when you exercise an ISO. This is dramatically different from the treatment of nonqualified options. Generally you report compensation income equal to the difference between the fair market value of the stock and the amount paid under the option when you exercise a nonqualified option."

[js2]

You still need to be very careful about this as the difference between strike and fair market counts toward AMT. Folks exercise ISOs and then hold them planning on selling at one year. In the mean time, the market plunges making the shares worthless, yet you still have to pay AMT. Double ouch.