Home Blog Nonqualified Stock Options Broken Down

Nonqualified Stock Options Broken Down

Jump to Section

What Are Nonqualified Stock Options?

A nonqualified stock option, also known as an NSO, is a form of employee compensation offered by employers wherein the option holder pays ordinary income tax on the profit made when they exercise the shares. They can also be granted by non-employers, such as contractors or consultants. NSOs make it possible for employees to benefit in the rising value of the stock of their employer, which creates extra performance incentives.

A private company will use NSOs to incentivize employees by giving them ‘skin in the game’ in the form of stock. Unlike ISOs, NSOs can be used with contractors and consultants and not just limited to employee.

How Nonqualified Stock Options Work

Nonqualified stock options are granted through a legal agreement between an employer and employee, which outlines the terms at which the company is willing to sell you stock. NSOs are granted with the expectation the value of the stock will increase so the employee can benefit in its gain.

The options are typically priced at the fair market value of the stock when the grant is issued. In other words, if a company’s current stock is valued at $50 per share at the time of the NSO grant, the exercise price will be $50. This means the employee has the opportunity to buy stock at $50 per share in the future, when hopefully the stock is valued higher at that time. The process is buying shares in the future is also known as exercising your options. The exercise price of NSOs can be set at a higher or lower price than the fair market value, depending on the terms of the agreement.

Important Terms In Nonqualified Stock Options:

  • Number of Shares. The number of shares is the total number of NSO shares the employee is granted in their compensation package. The employee will have the option to exercise its options in the future to buy these shares.
  • Exercise Price. The exercise price is the fair market value of the shares at the time of grant, which is the price at which an employee can purchase them in the future. In the perfect world, the future value of the shares will be higher than the exercise price.
  • Grant Date. The grant date is the date the NSOs are issued to the employee, which is typically made official by signing a contract (LINK). The grant date is what the expiration date is formulated from.
  • Expiration Date. The expiration date is when the options will expire. This is typically years after the grant date.
  • Vesting Schedule. The vesting schedule outlines the time it takes for the employee to gain ‘vested interest’ in the company. In other words, an employee will need to work for a certain amount of time to be given the option to purchase the shares.

Not all employee stock purchase plans (ESPP) are the same. Below is an outline of NSOs vs other ESPPs.

Nonqualified Stock Options (NSOs) vs. Incentive Stock Options (ISOs)

Nonqualified stock options differ from qualified stock options, which are more commonly referred to as incentive stock options (ISOs). Here are two main differences:

  • Nonqualified stock options are taxed like ordinary income. NSOs are subject to ordinary income tax, as well as FICA and Medicare taxes. ISOs potentially qualify to be taxed at capital gains rate if the options holder meets certain qualifications.
  • Nonqualified stock options are issued to contracts or consultants, essentially workers that are not considered employees. ISOs are different can only be issued to employees.

Here is an article about incentive stock options.

Meet some lawyers on our platform

LeMont J.

1 project on CC
CC verified
View Profile

Allen L.

134 projects on CC
CC verified
View Profile

Steven S.

73 projects on CC
CC verified
View Profile

Sara S.

257 projects on CC
CC verified
View Profile

Nonqualified Stock Options vs. Restricted Stock Unites (RSUs)

Restricted Stock Units (RSUs) differ from stock options generally and are used

  • RSUs are not an option. RSUs have a structure where employees receive shares after a certain amount of time spent at their employer. NSOs are options, so the employee will still need to purchase the shares in the future at the exercise price.
  • RSUs are taxed when they are vested at regular income. NSOs are taxed when exercised.

Here is an article that goes into the differences between more employee compensation tools.

ContractsCounsel Nonqualified Stock Options Image

Image via Pexels by Serpstat

Nonqualified Stock Options Tax

Given the expectation is that value of options will have increased over time, the employee stands to make a profit when they exercise their NSOs which counts as taxable income. One of the big differences between ISOs vs NSOs is that NSOs are taxed the same as ordinary income.

Once you exercise your nonqualified stock options, the difference between the current stock price (price at the time you exercise) vs. the exercise price, or strike price, becomes your profit. This will become your tax liability.

Below is a simple equation for this math:

Tax Liability = Number of Exercised Shares * (Market Value of Shares at Exercise – Strike Price)

For example:

  • If you exercise 1,000 shares at a strike price of $50
  • The fair market value of the shares at the time of exercise is $75
  • You pay $50,000 to exercise your options (Number of Share * Strike Price)
  • In return, you receive $75,000 worth of shares (Number of Shares * Fair Market Value of Share at Exercise)
  • Your tax liability is $25,000 ($75,000 - $50,000 = $25,000)

In the above example, the $25,000 profit the employee made will be taxed at the ordinary income and is usually reported on your paystub. There are is no tax liability when you receive your options.

Here are some tax lawyers to consult.

Are NSOs subject to FICA?

Generally, there is no tax on the issuance of options. Once the options are exercised, the option holder will pay ordinary income tax and is subject to FICA and Medicare, and tax withholding is required for employees.

Here is an article about FICA tax.

Most Important Terms In Nonqualified Stock Options

Given the issuance of options to employees are done through legal agreements, it is important to understand the key terms of your options contract. Below are some of the most important terms to keep in mind:

  • Exercise (Strike) Price. The exercise price, or strike price, is the price at which the company offers the employee shares in the future. In other words, a company may offer a strike price of $20 per share. This means the company believes the shares are valued at $20 per share at the current time of issuance.
  • Vesting Date. The vesting date is typically the first day an employee is allowed to exercise their options.
  • Vesting Schedule. The vesting schedule is the timeframe set up by the employer that an employee needs to stay to earn the right to purchase the shares in the future. Often, you will see a ‘one year cliff’, which means the employee will need to stay a minimum of one year for any shares to ‘vest’.
  • Fair Market Value. The fair market value of the stock is typically done through a 409A valuation, which gives a fair market valuation of their shares. The exercise price is typically set off some fair market valuation of the stocks.
  • Expiration Date. The expiration date is the time at which an employee can no longer purchase the shares of the company.
  • Exercise Method. The exercise method is the way in which the employee will pay for the future shares. This can be done through cash, stock swaps, and other methods. The specific exercise method may vary depending on the terms of the NSO agreement.

Here is an article about to help you better understand vesting.

NSOs and ContractsCounsel

Post your project to ContractsCounsel for free and receive proposals from attorneys to help you with your Nonqualified Stock Options. We have a network of experts in employee stock purchase plans that can help advise you.


ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.


How ContractsCounsel Works
Hiring a lawyer on ContractsCounsel is easy, transparent and affordable.
1. Post a Free Project
Complete our 4-step process to provide info on what you need done.
2. Get Bids to Review
Receive flat-fee bids from lawyers in our marketplace to compare.
3. Start Your Project
Securely pay to start working with the lawyer you select.

Meet some of our Lawyers

Eric H. on ContractsCounsel
View Eric
5.0 (3)
Member Since:
April 9, 2026

Eric H.

Partner
Free Consultation
Saint Paul, MN
25 Yrs Experience
Licensed in MN
University of Wisconsin

I'm a M&A, start-up, and commercial attorney providing biglaw service on SMB budgets. Basically, I help people spend large amounts of money slightly less terrifyingly. :)

Recent  ContractsCounsel Client  Review:
5.0

"Don't hesitate with Eric. He immediately made me feel at ease about ability to represent me and to tough contractual matter. His work is outstanding and his responsiveness put me at ease. As a physician and a client, I can certainly say that Eric is the one who gets the job done. Recommend highly"

Chaz G. on ContractsCounsel
View Chaz
5.0 (2)
Member Since:
April 15, 2026

Chaz G.

Business Lawyer
Free Consultation
Dallas, TX
13 Yrs Experience
Licensed in NY, TX
American University - Washington College of Law

As a former corporate attorney at one of the world's premier global law firms and former in-house counsel at Texas Instruments, a Fortune 500 technology leader, I bring big-firm expertise and corporate-level sophistication to entrepreneurs, startups, and small business owners who deserve the same quality legal support as the largest companies in the world. As a lawyer and startup founder with products currently being sold in national retail chains, I've spent my career at the intersection of complex business transactions, corporate law, and policy. I know how deals get done, where contracts go wrong, and how to protect businesses before problems arise. Now, I put that experience to work for founders and business owners who need practical, straightforward legal guidance without the intimidating price tag of a major law firm. Whether you're signing your first vendor contract, structuring a partnership, protecting your intellectual property, or navigating a business dispute, I translate the law into plain language so you can make confident decisions and focus on growing your business. What I bring to the table: - Complex commercial transactions experience at an AmLaw 100 firm - 7+ years as in-house counsel at a Fortune 500 company - Deep understanding of how businesses actually operate day-to-day - Flat-fee, transparent pricing with no billing surprises - Fast turnaround and direct communication If you're building something, I want to help you protect it.

Recent  ContractsCounsel Client  Review:
5.0

"Chaz was extremely helpful, thorough, and professional. I hired him for a cease and desist letter involving an unauthorized use of my company’s business identity, EIN, and credit. He took the time to review the documents carefully, explain the legal issues in plain English, and help me understand the strengths and challenges of my situation. What stood out most was how organized he was. He prepared a legal analysis memo before our call, walked me through the authority issues, and adjusted his approach after reviewing additional company documents. He was patient, clear, and never made me feel rushed, even though the situation involved several complicated details. The final work product was strong, detailed, and tailored to my specific facts rather than feeling like a generic template. I would definitely recommend Chaz to anyone who needs a knowledgeable attorney who communicates clearly and takes the time to understand the full picture."

Caroline N. on ContractsCounsel
View Caroline
5.0 (3)
Member Since:
April 18, 2026

Caroline N.

Attorney
Los Angeles County, California
4 Yrs Experience
Licensed in CA
Chapman Fowler School of Law

Caroline K. Nam, Esq. is a solo attorney who provides legal counsel with a management-first mindset, combining legal expertise with proactive policy development. Prior to starting her own practice, Caroline gained extensive legal experience as a litigator defending and advising employers of all sizes, ranging from a single business owner, to a small family-owned winery, and major, nationwide corporations. Caroline also has experience on the plaintiffs' side representing survivors of sexual abuse against school districts and churches. With her unique litigation background and expertise representing both plaintiffs and defendants, Caroline understands that legal compliance is only a piece of the puzzle for business success. She is committed to leading with compassion to provide a personalized, approachable service for each client. Having safeguarded companies against a variety of business and employment disputes, Caroline is focused on preventative risk management, helping owners reduce potential employment litigation that she has defended firsthand in court. Caroline is dedicated to helping entrepreneurs spend less time worried about liability and more time focusing on business growth. Based in Los Angeles County, she provides accessible, actionable legal solutions throughout Southern California. During her free time, Caroline enjoys yoga and serving her Los Angeles community. In 2025, she partnered with NLSLA to provide pro bono legal services to individuals impacted by the Eaton Fire. Currently, she serves on the board of directors of a nonprofit organization based in Los Angeles.

Recent  ContractsCounsel Client  Review:
5.0

"I had Caroline create a liability waiver for my Sports Fencing Club. She was prompt in completing the task, helpful and courteous in answering my questions, and in every way professional. I would use her services again if required."

Erica L. on ContractsCounsel
View Erica
Member Since:
March 1, 2026

Erica L.

Principal Attorney
Free Consultation
Austin, TX
7 Yrs Experience
Licensed in TX
Lewis & Clark Law

I’m an experienced attorney offering practical, client-centered representation across contracts, estate planning (wills), and family law matters. I focus on clear communication, efficient strategy, and results that fit real life, not just the rulebook. Whether you need a straightforward document or steady advocacy through a difficult transition, I provide reliable guidance from start to finish.

Matthew R. on ContractsCounsel
View Matthew
Member Since:
March 5, 2026

Matthew R.

Attorney
Free Consultation
Boston, Massachusetts
7 Yrs Experience
Licensed in FL, MA
Suffolk University Law School

Matt Rubner is a Florida and Massachusetts licensed attorney. His practice focuses on estate planning, prenuptial and postnuptial agreements, and civil litigation, with an emphasis on providing clear, practical legal guidance tailored to each client’s specific circumstances. Matt works with individuals and families to create thoughtful estate plans that protect assets, avoid unnecessary probate complications, and ensure that a client’s wishes are clearly documented. His estate planning services commonly include revocable living trusts, wills, powers of attorney, healthcare directives, and guidance on properly funding trusts and coordinating beneficiary designations. He also regularly advises clients on prenuptial and postnuptial agreements. Matt approaches these matters with a practical and balanced perspective, helping couples create agreements that clearly define financial expectations while preserving fairness and transparency for both parties. In addition to his transactional work, Matt maintains an active litigation practice and represents clients in a variety of civil matters. His litigation experience gives him a strategic perspective when drafting agreements and estate plans, allowing him to anticipate potential disputes and structure documents in a way that reduces future conflict. Matt represents clients in both Florida and Massachusetts and frequently works with individuals who have assets, businesses, or family connections in multiple states. He focuses on making the legal process straightforward, efficient, and understandable so clients can make informed decisions with confidence.

Spencer J. on ContractsCounsel
View Spencer
Member Since:
April 8, 2026

Spencer J.

Fractional General Counsel
Free Consultation
Los Angeles, CA
17 Yrs Experience
Licensed in CA
Loyola Law School

I provide the strategic legal guidance of an in-house general counsel without the full-time overhead. Whether you're launching a startup, scaling your digital business, or navigating complex privacy regulations, I'm here to help. With a practice concentrated in privacy law, digital marketing compliance, and small business operations, I help clients make informed decisions that protect their interests while supporting their growth objectives.

Gene R. on ContractsCounsel
View Gene
Member Since:
May 6, 2026

Gene R.

Lawyer
Free Consultation
San Jose, CA
30 Yrs Experience
Licensed in CA, DC
Harvard Law School

I help founders and business owners set up core contracts, deal documents, and ownership terms so they can form companies, close business sales, bring in partners, and launch products without expensive surprises later. I focus on LLC and corporation formations and operating/shareholder agreements, business sales, founder and partner arrangements (including buyouts and separations), commercial contracts (NDAs, MSAs, privacy policies), and IP/SaaS ownership and licensing tied to those deals. Clients describe me as “the antidote to Big Law inefficiency,” “a legal sniper,” and say I’ve “potentially saved hundreds of thousands” by catching gaps other lawyers missed. I do all my own work, explain options in plain English, and give clear scope and hour ranges before I start. Harvard Law (cum laude), MIT, former Wilson Sonsini attorney, and GC/VP Legal for media and tech companies and venture‑backed startups, with a 5.0 rating and repeat clients on this platform.

Nick G. on ContractsCounsel
View Nick
Member Since:
March 20, 2026

Nick G.

Attorney
Free Consultation
San Diego, California
1 Yr Experience
Licensed in CA
University of California College of the Law, San Francisco

My name is Nick Gleason, and I’m an attorney licensed in California and a veteran of the United States Navy. While in law school, during my clerkship with Mob Entertainment, I worked under the General Counsel, drafting cease and desist letters, demand letters, and assignment and licensing agreements. I also worked with outside counsel on copyright infringement matters, helping to protect the interests of the company. Now in my professional practice, I continue to help clients like you protect your interests by offering affordable legal representation for all your contract and copyright needs. I can draft contracts, review proposed agreements for vulnerabilities, and negotiate terms on your behalf, as well as prepare effective cease and desist letters and demand letters tailored to your situation, including in copyright and DMCA-related matters. I will always be fair and transparent with my fees. I’d love to hear from you.

Michelle D. on ContractsCounsel
View Michelle
Member Since:
March 27, 2026

Michelle D.

Family Lawyer
Free Consultation
Washington, DC
22 Yrs Experience
Licensed in MD
Emory University School of Law

My career experience has been varied. Although litigation has been a central focus, I’ve served as Of Counsel for a franchise law firm, negotiating contracts with franchisees and vendors to ensure the best terms possible for my client. I have demonstrated acumen in leading and supervising the work of others. As an associate attorney for Shulman Rogers, I oversaw the Summer Intern Program. Throughout my career I directed the work of paralegals and legal receptionists. As a solo practitioner I employed a junior attorney. At each phase I was responsible for the work and performance of another. In my transactional practice I regularly advise clients on agreements, negotiate favorable terms on their behalf, draft agreements, interpret contractual provisions in disputes, provide opinion letters, and represent clients in mediation and arbitration. I’m accustomed to working in high stress, high stakes environments with quick deadlines, demanding and often emotional clients, while performing work that requires great detail, accuracy, and advocacy.

Fahad J. on ContractsCounsel
View Fahad
Member Since:
April 20, 2026

Fahad J.

Commercial Contracts and M&A Lawyer
Free Consultation
Los Angeles, California
11 Yrs Experience
Licensed in CA, TX
SMU Dedman School of Law, Magna Cum Laude (Attended on full ride, graduated Top 10%)

Fahad Juneja is a transactional attorney with over 10 years of experience, admitted in California and Texas. His practice covers M&A, commercial contracts, and corporate governance, including drafting and negotiating purchase agreements and related transaction documents, NDAs, collaboration agreements, service agreements, consulting agreements, and other commercial contracts. Fahad began his career in the private equity M&A group of a large law firm (Sidley), then moved in-house to Paramount Pictures, and later advised technology and manufacturing clients at a Bay Area boutique. He now maintains a solo practice, where he supports a primary client and advises fintech and other emerging companies on commercial, corporate, and strategic matters. Fahad's approach emphasizes efficient negotiation, thoughtful drafting, and practical risk allocation. He is available to support M&A transactions, ancillary transaction documents, contract drafting and review, and general corporate matters.

Find the best lawyer for your project

Browse Lawyers Now

Quick, user friendly and one of the better ways I've come across to get ahold of lawyers willing to take new clients.

View Trustpilot Review

Need help with a legal contract?

Post Your Project

Get Free Bids to Compare

Hire Your Lawyer

CONTRACT LAWYERS BY TOP CITIES
See All Employment Lawyers
NONQUALIFIED STOCK OPTIONS LAWYERS BY CITY
See All Nonqualified Stock Options Lawyers

Contracts Counsel was incredibly helpful and easy to use. I submitted a project for a lawyer's help within a day I had received over 6 proposals from qualified lawyers. I submitted a bid that works best for my business and we went forward with the project.

View Trustpilot Review

I never knew how difficult it was to obtain representation or a lawyer, and ContractsCounsel was EXACTLY the type of service I was hoping for when I was in a pinch. Working with their service was efficient, effective and made me feel in control. Thank you so much and should I ever need attorney services down the road, I'll certainly be a repeat customer.

View Trustpilot Review

I got 5 bids within 24h of posting my project. I choose the person who provided the most detailed and relevant intro letter, highlighting their experience relevant to my project. I am very satisfied with the outcome and quality of the two agreements that were produced, they actually far exceed my expectations.

View Trustpilot Review

How It Works

Post Your Project

Get Free Bids to Compare

Hire Your Lawyer

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call

Find lawyers and attorneys by city