What are the key differences between ISO and NSO stock options?

**Eligibility**: ISOs can only be granted to employees, while NSOs can be granted to employees, consultants, board members, and advisors.

**Tax Treatment at Exercise**: Exercising ISOs does not trigger regular income tax immediately, whereas exercising NSOs results in ordinary income tax on the difference between the exercise price and the fair market value at exercise.

**Alternative Minimum Tax (AMT)**: When exercising ISOs, the bargain element (the difference between the exercise price and fair market value) could trigger AMT obligations, which does not apply to NSOs.

**Long-term vs.

Short-term Capital Gains**: ISOs can qualify for long-term capital gains tax rates if the shares are held for at least one year after exercising and two years after the grant date.

NSOs do not have this benefit and capital gains tax is applied based on the holding period after selling.

**Disqualifying Disposition**: If ISOs are sold before the required holding periods are met, they become disqualified dispositions and are taxed as ordinary income on the bargain element.

NSOs do not have such holding period requirements.

**Taxation at Sale**: For ISOs, taxes are incurred at the time of sale, while NSOs incur taxes at the exercise date, potentially leading to a higher tax burden for NSO holders.

**Vesting Period**: Both ISOs and NSOs usually have vesting schedules, but ISOs often require that options be exercised within a specific time frame after employment termination, generally within 90 days.

**Stockholder Rights**: Employees do not have stockholder rights (like dividends or voting rights) until the options are exercised, but this is equally true for both ISOs and NSOs.

**Impact on Creditors**: Neither ISOs nor NSOs can usually be assigned or transferred to anyone else, making them less valuable in bankruptcy or creditor situations.

**Income Reporting**: NSOs require reporting ordinary income upon exercise, leading to additional payroll withholding for the employer.

ISOs, on the other hand, do not require withholding at the time of exercise.

**Plan Limits**: ISOs are subject to specific regulatory guidelines limiting the maximum value of options that can become exercisable in any calendar year to $100,000.

NSOs do not have such limitations.

**Flexibility**: NSOs offer more flexibility in terms of how they are structured and who can receive them compared to ISOs, making them a popular choice for companies to grant to a broader range of individuals.

**Regulatory Oversight**: ISOs are qualified options under the Internal Revenue Code, meaning they must meet specific criteria to receive favorable tax treatment.

NSOs do not need to meet any such qualifications.

**Liquidity Events**: In scenarios like mergers or acquisitions, the treatment of ISOs and NSOs can vary significantly, especially regarding whether they are cashed out or converted into shares of the new entity.

**Expiration**: Both options generally have a 10-year expiration but may have different provisions concerning early termination upon employee departure that can affect their usability.

**Employee Preference**: Employees often prefer ISOs due to their favorable tax treatment, but companies may favor granting NSOs, as they are easier to administer and offer greater flexibility.

**Company Financial Impact**: Issuing NSOs can have a greater immediate financial impact on a company due to their tax implications for the employee, where ISOs may only result in a tax event when shares are finally sold.

**Common Usage**: Startups often use NSOs as a tool to attract talent, as they can give them to a broader range of team members (not just employees), while ISOs are often reserved for key employees.

**Market Perception**: The presence of ISOs in a stock option plan can indicate a company's desire to incentivize employees over the long term, potentially instilling loyalty and commitment.

**Complexity in Tax Planning**: The complexity of tax implications associated with ISOs, particularly with AMT, often necessitates financial advice for employees, making the understanding of both ISO and NSO essential for better financial planning.