Nonqualified Stock Options Broken Down

Clients Rate Lawyers on our Platform 4.9/5 Stars
based on 2,277 reviews

Jump to Section

Need help with a legal contract?

Post Project Now

Post Your Project (It's Free)

Get Bids to Compare

 Hire Your Lawyer

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. 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.

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. 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

Scott S.

11 projects on CC
View Profile

Max M.

87 projects on CC
View Profile

Garrett M.

4 projects on CC
View Profile

Maxwell L.

4 projects on CC
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.


Get Free Bids to Compare

Leverage our network of lawyers, request free bids, and find the right lawyer for the job.

Get Bids Now

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.

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.

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

View Sammy
Member Since:
November 4, 2020

Sammy N.

Attorney
Free Consultation
Get Free Proposal
Raleigh, NC
3 Yrs Experience
Licensed in NC
Campbell University School of Law

Sammy Naji focuses his practice on assisting startups and small businesses in their transactional and litigation needs. Prior to becoming a lawyer, Sammy worked on Middle East diplomacy at the United Nations. He has successfully obtained results for clients in breach of contract, securities fraud, common-law fraud, negligence, and commercial lease litigation matters. Sammy also counsels clients on commercial real estate sales, commercial lease negotiations, investments, business acquisitions, non-profit formation, intellectual property agreements, trademarks, and partnership agreements.

View Brad
Member Since:
November 6, 2020

Brad H.

Principal
Free Consultation
Get Free Proposal
Raleigh, NC
10 Yrs Experience
Licensed in NC
University of North Carolina

Brad is a business attorney with experience helping startup and growing companies in a variety of industries. He has served as general counsel for innovative companies and has developed a broad knowledge base that allows for a complete understanding of business needs.

View Matthew
Member Since:
November 6, 2020

Matthew R.

Attorney
Free Consultation
Get Free Proposal
Denver, Colorado
15 Yrs Experience
Licensed in CO, OH
Case Western Reserve University

I am an attorney located in Denver, Colorado with 13 years of experience working with individuals and businesses of all sizes. My primary areas of practice are general corporate/business law, real estate, commercial transactions and agreements, and M&A. I strive to provide exceptional representation at a reasonable price.

View Christopher
Member Since:
November 6, 2020

Christopher S.

Partner
Free Consultation
Get Free Proposal
Toledo, Ohio
5 Yrs Experience
Licensed in OH
University of Toledo

Chris Sawan is a JD/CPA who practices in the area of business law, contracts and franchising in the State of Ohio.

View Elizabeth
Member Since:
November 23, 2020

Elizabeth C.

Contracts Specialist
Free Consultation
Get Free Proposal
Sarasota, FL
13 Yrs Experience
Licensed in NJ, NY
Quinnipiac University School of Law

As an experienced contracts professional, I offer an affordable method to have your contracts reviewed! With my review of your contract, you can understand and reduce risks, negotiate better terms, and be your own advocate. I am an Attorney, Board Member, and Freelance Writer with a Bachelor of Arts degree, magna cum laude, in Film, Television and Theatre (“FTT”) from The University of Notre Dame. I was awarded The Catherine Hicks Award for outstanding work in FTT as voted on by the faculty. I graduated, cum laude, from Quinnipiac University School of Law, where I earned several awards for academics and for my work in the Mock Trial and Moot Court Honor Societies. Additionally, in my career, I have had much success as an in-house Corporate Attorney with a broad range of generalist experience and experience in handling a wide variety of legal matters of moderate to high exposure and complexity. My main focus in my legal career has been contract drafting, review, and negotiation. I also have a background in real estate, hospitality, sales, and sports and entertainment, among other things.

View Elizabeth
Member Since:
January 20, 2021

Elizabeth R.

Attorney
Free Consultation
Get Free Proposal
Columbus, Ohio
11 Yrs Experience
Licensed in FL, OH
Florida International University School of Law

Elizabeth is an experienced attorney with a demonstrated history of handling transactional legal matters for a wide range of small businesses and entrepreneurs, with a distinct understanding of dental and medical practices. Elizabeth also earned a BBA in Accounting, giving her unique perspective about the financial considerations her clients encounter regularly while navigating the legal and business environments. Elizabeth is highly responsive, personable and has great attention to detail. She is also fluent in Spanish.

View Abby
Member Since:
December 8, 2020

Abby V.

President
Free Consultation
Get Free Proposal
Washington, DC
15 Yrs Experience
Licensed in DC, NJ, NY
Loyola University Chicago School of Law

Abby is an attorney and public policy specialist who has fused together her experience as an advocate, education in economics and public health, and passion for working with animals to create healthier communities for people and animals alike. At Opening Doors PLLC, she helps housing providers ensure the integrity of animal accommodation requests, comply with fair housing requirements, and implement safer pet policies. Abby also assists residents with their pet-related housing problems and works with community stakeholders to increase housing stability in underserved communities. She is a nationally-recognized expert in animal accommodation laws and her work has been featured in The Washington Post, USA Today, Bloomberg, and Cosmopolitan magazine.

View Brit
Member Since:
December 29, 2020

Brit B.

General Counsel
Free Consultation
Get Free Proposal
Remote (company based in Houston)
8 Yrs Experience
Licensed in TX
University of Maryland, School of Law

First in-house counsel for small TX-based company operating in the Middle East. Experienced with drafting, revising, and editing a variety of domestic and international contracts.

View Matan
Member Since:
January 4, 2021

Matan S.

Attorney
Free Consultation
Get Free Proposal
Philadelphia, PA
9 Yrs Experience
Licensed in NJ, PA
Rutgers

Matan is an experienced M&A, corporate, tax and real estate attorney advising closely held businesses, technology start ups, service businesses, and manufacturers in purchases, sales, and other exit strategies. Matan works with founders and first-and-second generation owners to strategically transition businesses.

View Octavia
Member Since:
January 30, 2021

Octavia P.

Attorney
Free Consultation
Get Free Proposal
Chicago, IL
15 Yrs Experience
Licensed in IL
The John Marshall Law School

I am a business law attorney with over 10 years’ experience and a strong background in information technology. I am a graduate of the University of California Berkeley, a member of the Illinois bar and a licensed lawyer (Solicitor) of England and Wales. I actively partner directly with my clients or indirectly, as Of Counsel, to boutique law firms to streamline business practices and manage legal risks by focusing on essentials such as - business contracts, corporate structure, employment/independent contractor agreements, website terms and policies, IP, technology, and commercial related agreements as well as business risk and compliance guidance.

View Sean
Member Since:
January 26, 2021

Sean D.

Business Attorney
Free Consultation
Get Free Proposal
Elkridge, Maryland
24 Yrs Experience
Licensed in MD
University of Maryland Francis King Carey School of Law

Accomplished and results-driven business attorney with extensive experience in commercial real estate / project finance, commercial transactions, and entity formations, that possesses a winning blend of subject matter expertise, skill in client relationship management, and practical experience. Leverages a unique mix of legal, strategic, and analytical expertise that consistently meets and surpasses client expectations. Specialties: Commercial Real Estate Law, Contract Negotiation, Entity Formation, Joint Ventures, Procurement, Lease/Buy/Sell Transactions, Business Consultations, Team Leadership, and Economic Development

Find the best lawyer for your project

Browse Lawyers Now

Want to speak to someone?

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

Request a call