Non-qualified stock options

Non-qualified stock options (NSO) give the right to the employees to purchase a set number of company’s shares within a designated time at a preset price.

Non-qualified stock options (NSO) give the right to the employees to purchase a set number of company’s shares within a designated time at a preset price. It is provided as a compensation to the employees in a company and is also a means to encourage employee loyalty towards the company.

They are a type of employee stock option where you pay ordinary income tax on the difference between the price at which the option is exercised and the grant price. NSOs are more common and simpler than incentive stock options (ISOs). They are called non-qualified stock options since they don’t meet all the requirements of the IRC (Internal Revenue Code) to be qualified as ISOs.

Just like other stock options, non-qualified stock options offers a method for reducing the cash compensation of companies for their employees, while also linking a part of their compensation towards growing the company. As per the option terms, the employees might have to wait for a period of time so that the options vest before they are exercised. This happens so that if the employee leaves the company before the shares are vested, they would lose the options. The plan also allows the clawback provisions that permit the company to reclaim NSOs for specific reasons, including a buyout of the company or insolvency.

For new and smaller businesses with limited resources, these options can be offered in lieu of salary increases. NSOs are also utilized as a recruiting tool to make up for shortcomings in the offered salaries while hiring new talents.

In case you have further questions about NSOs, Eqvista can help you with explaining it more in details also our cap table application can help you manage the shares of the company. So, contact us to find out more!

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