Incentive Stock Options

Incentive stock options are a type of equity compensation award given by companies to their employees (they cannot be given to outside contractors). They are typically given to key employees that companies want to retain for as long as possible, while providing such employees with the opportunity to share in the potential growth in the value of the company’s stock price — assuming the value of the company’s shares has increased when the employee exercises the option and sells the underlying shares, then the employee will benefit by “buying low and selling high.” The awards are given to employees pursuant to a company’s stock option plan (also known as an equity incentive plan). Such plans often also include other types of equity compensation awards, such as non-qualified stock options (“NSO’s” or “NQSO’s”) and restricted stock awards. ISO’s are generally treated more favorably, from a tax perspective, than non-qualified stock options, but there are limitations on the number of incentive stock options that a company may award to its employees. When setting up stock option plans, companies often create different types of awards under the plan so that the company can have flexibility in awarding the right types of equity compensation to the right types of employees or outside contractors.