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Non-qualified Stock Options (NSOs) are stock options that, when exercised, result in ordinary income under US tax laws on the difference, calculated on the exercise date, between the exercise price and the fair market value of the underlying shares.
Non-qualified stock options (typically abbreviated NSO or NQSO) are stock options which do not qualify for the special treatment ed to incentive stock options. Incentive stock options (ISOs) are only available for employees and other restrictions apply for them.
For example, RSU and NQSO have different rules about when they are taxed (RSUs at vesting, no choice) (NQSOs at exercise, choice of timing). It's also reasonable to assume that when offered the choice, you may get ?more? NQSOs than you would RSUs. And finally, RSUs do not cost anything to purchase, whereas NQSOs do.
Nonqualified: Employees generally don't owe tax when these options are granted. When exercising, tax is paid on the difference between the exercise price and the stock's market value. They may be transferable. Qualified or Incentive: For employees, these options may qualify for special tax treatment on gains.
When compared to ISOs, RSUs are less risky and not dependant on the stock price at any given time. They offer a more predictable revenue stream and guarantee at least some money as long as the company's stock has value by the vesting date.
If a stock option isn't an ISO, it's typically referred to as a nonqualified stock option. NQOs don't qualify for special tax treatment. The favorable tax treatment is the main advantage of ISOs for employees, and this includes long-term capital gains and no recognition of income when they exercise their options.
ISOs have more favorable tax treatment than non-qualified stock options (NSOs) in part because they require the holder to hold the stock for a longer time period. This is true of regular stock shares as well.
NQOs are unrestricted. As such, they can be offered to anyone. That means that you can extend them to not just standard employees, but also directors, contractors, vendors, and even other third parties. ISOs, on the other hand, can only be issued to standard employees.