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An incentive stock option (ISO) is a corporate benefit that gives an employee the right to buy shares of company stock at a discounted price with the added benefit of possible tax breaks on the profit.
When compared to ISOs, RSUs are less risky and not dependant on the stock price at any given time. They offer a more predictable revenue stream and guarantee at least some money as long as the company's stock has value by the vesting date.
Non-qualified stock options are more straightforward, as the tax implications at exercise are generally agreed to be easier to understand. Incentive stock options, while more complicated, offer the opportunity for long-term capital gains if you meet the requisite holding period requirements.
For example, RSU and NQSO have different rules about when they are taxed (RSUs at vesting, no choice) (NQSOs at exercise, choice of timing). It's also reasonable to assume that when offered the choice, you may get ?more? NQSOs than you would RSUs. And finally, RSUs do not cost anything to purchase, whereas NQSOs do.
There are many requirements on using ISOs. First, the employee must not sell the stock until after two years from the date of receiving the options, and they must hold the stock for at least a year after exercising the option like other capital gains. Secondly, the stock option must last ten years.
If a stock option isn't an ISO, it's typically referred to as a nonqualified stock option. NQOs don't qualify for special tax treatment. The favorable tax treatment is the main advantage of ISOs for employees, and this includes long-term capital gains and no recognition of income when they exercise their options.
Non-qualified stock options (typically abbreviated NSO or NQSO) are stock options which do not qualify for the special treatment ed to incentive stock options. Incentive stock options (ISOs) are only available for employees and other restrictions apply for them.
NQOs are unrestricted. As such, they can be offered to anyone. That means that you can extend them to not just standard employees, but also directors, contractors, vendors, and even other third parties. ISOs, on the other hand, can only be issued to standard employees.