Non-Qualified Stock Options (NSOs) are a type of stock option that companies commonly use to compensate employees, consultants, and advisors. NSOs differ from Incentive Stock Options (ISOs) in terms of tax treatment and eligibility requirements. With NSOs, employees have the right to purchase a specific number of company shares at a predetermined price (known as the exercise or strike price) within a specified period, typically called the vesting period.
One of the key distinctions between NSOs and ISOs is the tax treatment. When employees exercise NSOs, the difference between the exercise price and the fair market value of the stock at the time of exercise is subject to ordinary income tax. This means that the employee must report the gain as taxable income in the year of exercise.
Unlike ISOs, which have certain eligibility criteria and can offer potential tax advantages if held for specific periods, NSOs are more flexible and can be granted to a broader range of employees and non-employees. However, because they don't qualify for special tax treatment, NSOs are often used when a company wants to provide more flexible compensation options or doesn't meet the requirements for ISOs.
Overall, Non-Qualified Stock Options can be a valuable component of an employee's compensation package, offering them the opportunity to share in the company's success and align their interests with those of the company's shareholders.
For more info on NSOs and their advantages and disadvantages, check out the Carta Blog: https://carta.com/blog/what-are-non-qualified-stock-options/
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Mahsa Kowsari
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