Many companies issue stock options as a form of compensation or as an incentive to various parties. At their most basic, stock options are the right of a party to buy company stock at a predetermined price for a period of time. Generally, the agreed-upon price is similar to the market price at the time at which the option is issued. Two of the most commonly issued types of stock options are Incentive Stock Options (ISOs) and Nonstatutory Stock Options (NSOs). The information below provides some basic information about each type and highlights some of the differences between the two. For specific information regarding these types of stock options and how they may affect your business, call the Structure Law Group today to speak with a qualified business attorney.
Incentive Stock Options
Incentive stock options can only be issued to employees, which means that members of the board of directors or independent contractors cannot be granted ISOs. These options are not subject to federal income tax when they are granted or exercised, but alternative minimum tax
may be imposed upon exercise in certain cases. Importantly, a company issuing an ISO can take a deduction for compensation paid if an employee chooses to engage in a disqualifying disposition of an ISO, such as an early sale. ISOs must be exercised within 10 years of the date that they are granted.
Nonstatutory Stock Options
NSOs can be issued to anyone, making them an attractive incentive to some companies. Unlike ISOs, however, federal income tax as ordinary income is imposed on the exercise of an NSO to the extent that the NSO is above market value of the stock at the time of exercise. Like ISOs, they are not taxable at the time of a grant, but unlike ISOs, they are subject to employment tax at the time that they are exercised. There is no annual limitation on the value of NSOs that can be issued (there is a $100,000 cap on ISOs), and unlike ISOs, the Alternative Minimum Tax is not applicable to the exercise of an NSO.
Contact a Silicon Valley business litigation law firm today to discuss your case
Any corporation considering issuing securities options to employees, directors, consultants, or other interested parties should consult with an attorney familiar with the tax consequences of both ISOs and NSOs. In many cases, issuing the appropriate form of stock option can result in favorable tax treatment for both the company as well as the parties receiving the option. The Silicon Valley business attorneys of the Structure Law Group are skilled lawyers who are dedicated to providing solution-oriented legal advice and representation to companies of all sizes. To schedule a consultation with an attorney, call our office today at 408-441-7500.