ISO

Stock Options are just one way for companies to compensate their staff. They can be both statutory and non-qualified with different pros and cons relevant to each classification. In this article, we are going to take a closer look at Incentive Stock Options (ISO), a statutory option. This type of option typically enjoys preferential tax treatment and can prove to be an important part of a key employee's compensation package.

What are ISOs?

If you are in a key position at your firm, especially early stage companies, your stock options may be offered in the form of ISOs. These stocks are used to help retain and remunerate key players within the organization.  

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On the grant date, the employee is able to purchase, or exercise, their options, usually at a price below the current trading level. Upon completion of the vesting period, the options can usually be purchased with cash, or depending on the tax strategy of the employee, they can be purchased via a cash-free stock swap.

 

ISO offerings do not have to include the entire company, unlike most other equity offerings. The firm is able to pick and choose the key employees that receive the options as they are used as incentive and to reward exemplary performance by key employees.

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Understanding Non-Qualified Stock Options

NQSO or NSO allows employees to buy a certain number of shares for a certain price level at a pre-set date. The options allow the worker to buy the shares, usually at the current market price, and if the options are not exercised, they expire without value. The employee is responsible for the tax burden caused by the increases in the stock value during the time period in which it is held.

NQSOs do not permit the employee to purchase stock for a price lower than the market value and they must pay for any capital gains when they opt to sell the stock. Because of this, it is important that the employee receive relevant advice on beneficial tax strategies, especially before they act to sell any of their NQSOs.