If your strike price is $.001/sh, and you exercise 1M options, you pay $1,000 to get 1M shares of stock. With NQOs, you get a right to buy company stock at a fixed strike price exercisable as your options vest over a prescribed period. To understand ISOs, you need to understand how all options are taxed apart from any special tax-advantaged rules.ģ. The substantive law rules relating to such options are the same as any other options and they are "non-qualified" only in the sense that they don't qualify for the special tax advantage of "incentive stock options" or ISOs, which are special types of options that get special tax advantages. The default rule here concerns so-called "non-qualified" options (NQOs, sometimes called NSOs as well, for "non-statutory options"). This is the optimum tax treatment for most startups but is normally made available only to founders.Ģ. In that case, you normally pay no tax up front and you pay only capital-gains tax on the stock as you later sell it. All of this, of course, is done away with if you file a timely 83(b) election. This theoretically could mean that you have as many as 48 taxable events during the 4-year period of vesting.
If your 1M shares vest at 1/48th per month over 4 years, and you paid $.001/sh, you would have to pay tax on the "spread' at each vesting point as long as the price exceeded $.001/sh at that point. Thus, with restricted stock, you are subject to tax at ordinary income rates on the difference between what you paid for it and what its value is at each vesting point. IRC 83(b) says that you do not receive such property immediately if it is subject to a "substantial risk of forfeiture" and that you will be taxed on it only when the forfeiture risk lapses and you truly own it. IRC 83(a) sets the baseline: you are taxed on the value of property (stock) received in exchange for services as ordinary income.
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A few technical points on tax (of course, check with your professional advisor for any real-world case):ġ.
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