Can incentive stock options be performance based?

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For example, could management accelerate vesting of ISOs based on performance/reviews (without negative consequences, such as the options becoming non-qualified).

This could be combined with an extremely long default vesting term, to allow for bonus/performance comp without requiring separate option grants (which would have higher strike prices).

Dan Walter's Answer

ISOs can certainly have performance conditions linked to vesting. You may still have to contend with ISOs being turned into NQSOs.  there is an annual $100,000 limit on ISOs that can first become exerciseable in any calendar year.  The value for this is based on multiplying Fair Market Value on the grant date by the number of ISOs that become exercisable (via vesting, or allowable "exercise prior to vest").  If the performance accelerates vesting in a given calendar year you would need to recalculate this limit for that year.  This may automatically cause some or all of the options to lose their ISO status.

Performance conditions on ISOs also requires careful structure.  There are potential IRC 409A issues, potential accounting issues and potential issues with the sections of the Code that govern qualified employee equity (IRC 421-424).  I would recommend that this not be done as a DIY project.

I agree with Mike Emleigh that most employees would find a subjective vesting component to be unplatable. And, if you "always" accelerate vesting, you may get in trouble with the spirit of performance conditions and the associated accounting and taxation that comes with that.

★ Do software engineering companies typically give you to stock packages to vest together over 4 years (you get x amount in 2013 you have been doing really well lately and get x amount in 2014?

Is it alright to not give shares to employees of a startup?