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The exercise price must not be less than the fair market value (FMV) of the stock on the date of grant (but see No. 6 below). The term of the options must not exceed 10 years from the date of grant (but see No. 6 below).
A company grants an employee options to buy a stated number of shares at a defined grant price. The options vest over a period of time and/or when certain individual, group, or corporate goals are met.
Non-qualified stock options require payment of income tax of the grant price minus the price of the exercised option. NSOs might be provided as an alternative form of compensation. Prices are often similar to the market value of the shares.
Non-qualified stock options benefit employers in ways that are similar to all other stock options. By serving as an effective compensation method, it reduces the potential cash outflow and allows the company to retain higher cash and liquidity for other needs.
As with other types of stock options, when you're granted NSOs, you're getting the right to buy a set number of shares at a fixed price, also called the strike price, grant price, or exercise price. A company's 409A valuation or fair market value (FMV) determines the strike price of an option.
If eligibility and holding period requirements are met, the bargain element is taxed as a capital gain to the employee. For non-qualified stock options, the bargain element is treated as ordinary income to the employee.
NSOs vs. RSUs NSOs give you the option to buy stock, but you might decide to never exercise them if the company's valuation falls below your strike price. In comparison, restricted stock units (RSUs) are actual shares that you acquire as they vest. You don't have to pay to exercise RSUs; you simply receive the shares.
Non-qualified stock options give employees the right, within a designated timeframe, to buy a set number of shares of their company's shares at a preset price. It may be offered as an alternative form of compensation to workers and also as a means to encourage their loyalty with the company. 1?