Non-Qualified Stock Option (NSO)

A non-qualified stock option (NSO) is a type of stock option that does not meet the requirements of an incentive stock option (ISO). As a result, NSO grants are taxed at the time of exercise, and the holder must pay ordinary income tax on the difference between the exercise price and the fair market value of the stock on the date of exercise.

NSOs are often used by startups and other companies that do not have the financial resources to issue ISOs. They are also used by companies that want to retain employees by giving them the opportunity to purchase stock at a discount.

There are a few key differences between NSO grants and ISO grants. First, NSO grants are taxed at the time of exercise, while ISO grants are taxed at the time of sale. Second, NSO grants do not have a vesting period, while ISO grants typically have a vesting period of three to five years. Third, NSO grants can be exercised at any time, while ISO grants can only be exercised during the vesting period.

NSOs can be a valuable tool for startups and other companies to attract and retain employees. However, it is important to understand the tax implications of NSO grants before issuing them.

Here are some additional details about NSO grants:

* The exercise price of an NSO is the price at which the holder can purchase the stock. The exercise price is typically set at the fair market value of the stock on the date of grant.
* The holder of an NSO can exercise the option at any time, but they must do so before the option expires. The expiration date of an NSO is typically 10 years from the date of grant.
* When an NSO is exercised, the holder must pay ordinary income tax on the difference between the exercise price and the fair market value of the stock on the date of exercise.
* The holder of an NSO can sell the stock that they purchased after the exercise date. However, they may have to pay capital gains tax on the sale if the stock has appreciated in value.

NSOs can be a complex financial instrument, so it is important to consult with a tax advisor before issuing them.