What is the difference between ISO and non-qualified stock options?

What is the difference between ISO and non-qualified stock options?

Incentive stock options are reserved for employees, offering them an opportunity to buy stock at a discounted price. What’s more, ISOs are subject to the capital gains tax rate. Non-qualified stock options may go to employees, company partners, vendors, or others that aren’t on the company payroll.

What is a fully vested stock option?

Being fully vested means a person has rights to the full amount of some benefit, most commonly employee benefits such as stock options, profit sharing, or retirement benefits.

What is stock option compensation?

Stock options are a form of compensation. Companies can grant them to employees, contractors, consultants and investors. These options, which are contracts, give an employee the right to buy or exercise a set number of shares of the company stock at a pre-set price, also known as the grant price.

Should I ask for NSO or ISO?

From the company’s standpoint, NSO is most advantageous because the company can take tax deductions when the employee or consultant exercises the stock option. That’s because with an NSO the stock option is considered ordinary income to the employee or consultant. With an ISO, there is no tax deduction for the company.

How do I know if my stock options are NSO or ISO?

NSOs (Non-qualified Stock Options) can be used to compensate employees, consultants, directors, business partners, and advisors. ISOs (Incentive Stock Options) can only be used to compensate employees. NSOs are taxed as regular income at the time of exercise and are not eligible for an IRS section 83b election.

When should I exercise my vested stock options?

Usually, you have several choices when you exercise your vested stock options: If you believe the stock price will rise over time, you can take advantage of the long-term nature of the option and wait to exercise them until the market price of the issuer stock exceeds your grant price and you feel that you are ready to exercise your stock options.

Should I buy stock options before they expire?

All stock options come with an expiration date, that is, the last date by which the option holder must exercise her option or lose it. Many people believe that it is wise to wait until just before the expiration date to exercise their stock options and purchase the option shares. And they may be right, under most circumstances.

What should be included in a stock option agreement?

This document usually includes details like the type of stock options you get, how many shares you get, your strike price, and your vesting schedule (we’ll get to this in the vesting section ). Your stock option agreement should also specify its expiration date.

How do stock options work for startups?

Types of startup stock options Stock options aren’t actual shares of stock—they’re the right to buy a set number of company shares at a fixed price, usually called a grant price, strike price, or exercise price. Because your purchase price stays the same, if the value of the stock goes up, you could make money on the difference.