Non-Qualified Stock Options

Like restricted stock and incentive stock options (“ISO”s”), non-qualified stock options (“NSO’s” or “NQSO’s”) are a type of equity compensation award given by companies to their key service providers pursuant to a company’s stock option plan. Unlike incentive stock options, which can only be awarded to employees, non-qualified stock options can be awarded to any service providers, but they are typically awarded to outside service providers. Companies award such options to key service providers that companies want to retain for as long as possible, while providing them with the opportunity to buy shares of the company’s stock at a low price and then, if all works out, sell those shares at a later date at an increased price. As compared to incentive stock options, NSO’s are typically treated less favorably, from a tax perspective, but the tax treatment will depend on how long the recipient of the NSO holds the award before exercising it and selling the underlying shares. Unlike ISO’s, the strike price of NSO”s isn’t restricted, but it’s typically still a good idea to set the strike price at the fair market value of the shares. Like ISO’s, there is no tax at the time of the award, as options in general are only a right to buy shares at some point in the future; they are not an issuance of shares.