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ISOs vs NSOs: Which option type should I grant?

The practical differences between incentive stock options (ISOs) and non-qualified stock options (NSOs).

Short Answer: ISOs (incentive stock options) can offer favorable tax treatment but can only be granted to employees and come with limits. NSOs (non-qualified stock options) are more flexible and can be granted to anyone, but are taxed as ordinary income at exercise.

ISOs: 

  • Employees only

  • No ordinary income tax at exercise if holding rules are met 

  • Subject to limits (ex: $100,000 per-year vesting limit)

NSOs:

  • Can be granted to employees, advisors, contractors, and board members

  • Taxed as ordinary income on the spread at exercise

Most companies grant ISOs to employees and NSOs to non-employees. Your 409A sets the strike price for both. Talk to a tax advisor about your specific grants. 

Related Articles: 

409A valuation (glossary)

Should I issue stock options or stock shares to an employee

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