A NSO is a type of employee stock option wherein you pay ordinary income tax on the difference between the grant price and the price at which you exercise the option. They are called non-qualified because they do not meet the requirements of the IRC to be qualified as ISOs.
- Non-qualified stock options require payment of income tax of the grant price minus the price of the exercised option.
- NSOs might be provided as an alternative form of compensation, especially in early-stage companies.
- NSOs allow employees to assume some of the risks of a new business, but they can also earn higher rewards if the company succeeds.
- NSOs allow the holder to buy a company's stock at a preset price at some time in the future. If the holder does not exercise them before the expiration date, they lose the option.