NSO & ISO for Beginners in 3 Examples | Startup Stock Options
Channel: Justeen15
Date: 2023-04-25

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ISO and NSO are two types of employee stock options (ESO) that are used as a form of compensation for employees. In this video I will go over both of them with step by step breakdowns with realistic examples. One key takeaway is that, NSOs are the straightforward one between the two, but ISO can trigger alternative minimum tax AMT that ultimately gives you AMT credit for tax benefits.

ISO (Incentive Stock Option):
ISOs are a type of stock option that can only be issued to employees of a company.
They have tax advantages for employees: if certain conditions are met, such as holding the shares for at least two years after the grant date and one year after exercise, the difference between the grant price and the sale price is taxed at long-term capital gains rates.

ISOs are subject to strict rules and regulations set by the Internal Revenue Service (IRS), such as annual limits on the amount of ISOs that can be granted to an employee.

NSO (Non-Qualified Stock Option):
NSOs can be granted to both employees and non-employees, such as contractors, consultants, and board members.

They do not have the same tax advantages as ISOs. The difference between the grant price and the sale price is taxed as ordinary income, subject to employment taxes and withholding.

NSOs have more flexibility than ISOs in terms of the terms and conditions of the option, such as vesting schedules and exercise price.

Overall, the main difference between ISOs and NSOs is that ISOs have more tax advantages for employees but are subject to stricter rules and regulations, while NSOs are more flexible but have less favorable tax treatment.

Understand NSO & ISO in 5 Examples (Spoiler: There Is a Better One)
NSO vs ISO in 5 Examples | Step by Step | Spoiler: There Is a Better One

*If the description sounds too formal, blame ChatGPT :P.

Related links & videos mentioned:
► Buy call 101 https://www.youtube.com/watch?v=8HHqotFAtPw&list=PLNgWNg4wjoKvlPiYwJTVnRlyLUTHkWLgU&index=1
► Buy put 101 https://www.youtube.com/watch?v=kmGKCBhH2Lo&list=PLNgWNg4wjoKvlPiYwJTVnRlyLUTHkWLgU&index=2
► Sell call 101 https://www.youtube.com/watch?v=km__LViBjmE&list=PLNgWNg4wjoKvlPiYwJTVnRlyLUTHkWLgU&index=3
► Sell put 101 https://www.youtube.com/watch?v=A7hB6QeOksA&list=PLNgWNg4wjoKvlPiYwJTVnRlyLUTHkWLgU&index=4

0:00 Intro to employee stock options
1:37 NSO scenario 1 early net settlement
4:46 NSO scenario 2 late net settlement
6:16 NSO scenario 3 early pay out of pocket
8:33 ISO scenario 1 no AMT
11:58 ISO scenario 2 with AMT
14:25 NSO vs ISO Side by side comparison

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