ISO vs NSO (stock options)

What is iso vs nso (stock options)?

ISOs and NSOs are the two kinds of stock options. Incentive stock options (ISOs) go only to employees and can qualify for capital-gains tax treatment if holding rules are met, with no ordinary income tax at exercise. Non-qualified stock options (NSOs) can go to anyone, but the spread at exercise is taxed as ordinary income.

Why it matters for fast-growing companies

The choice drives your team's tax bill. ISOs can save employees real money but carry AMT exposure and strict holding periods; NSOs are simpler and more flexible but taxed as income the moment they're exercised. Advisors, contractors, and board members can only get NSOs. Classify each grant correctly at grant time, fixing it later is painful.

Related terms

• Fundraising & equityRestricted stock unit (RSU)A restricted stock unit (RSU) is a company promise to give you shares once you vest, no purchase, no strike price.
• Fundraising & equityVesting scheduleA vesting schedule is the timeline over which someone earns their equity, rather than owning it all at once.
• Fundraising & equityOption poolAn option pool is a block of shares a company reserves to grant as equity to employees, advisors, and future hires.
• Tax & credits83(b) electionAn 83(b) election tells the IRS to tax restricted stock at its (usually tiny) value on the grant date rather than as it vests.

Frequently asked questions