Stock Options Calculator & Guide

Non-Qualified Stock Options (NSOs)
For NSOs, employees typically must pay ordinary income taxes when they exercise their option to purchase shares and must pay capital gains tax when they sell those shares.

Incentive Stock Options (ISOs)
Unlike with NSOs, if an employee holds onto his ISOs for the obligatory waiting period (one year after exercising and two years following your grant date), then he’ll only have to pay capital gains taxes when he sells his shares. If an employee doesn’t sell his shares in the same year he exercises them, it’s possible he’ll have to pay alternative minimum tax (AMT) on the exercised shares. ISOs are also called statutory or qualified stock options.
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Restricted Stock Options (RSOs)
Restricted stock options (RSOs) are a specific type of stock options that are typically granted to company executives. They are “restricted,” because they are distributed to an employee according to a graded vesting schedule that lasts a particular length of time, typically a few years. In the event of a firing or an employee’s inability to achieve certain milestones, it’s possible that a person would be forced to forfeit his RSOs. Restricted stock is taxable at the completion of the vesting schedule and must be taxed as ordinary income in the year in which shares are vested.


Performance Shares
Performance shares are stock options granted to employees exclusively when specific predetermined criteria are fulfilled. These criteria may encompass metrics like achieving an earnings per share (EPS) target, attaining a specified return on equity (ROE), or elevating the overall return of the company's stock relative to an index. Generally, these performance periods extend over a multi-year timeframe.
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How to Calculate Non-Qualified Stock Options
The strike price of a stock option is established based on a company's 409A valuation or fair market value (FMV). If the share value rises over time, there is a potential for profit through the difference (the spread) between your predetermined purchase price and the eventual selling price.


Pros of Non-Qualified Stock Options
Broadly speaking, stock options entail more risk compared to salary compensation, yet they present the possibility of higher rewards in the event of substantial company growth. Compared to incentive stock options (ISOs), non-qualified stock options (NSOs) offer a few advantages. They are not subject to alternative minimum tax (AMT). In addition, they don’t have any holding requirements. What’s more, employees only permitted  to exercise $100,000 of ISOs a year, a limit that does not apply to the more flexible NSOs.
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Cons of Non-Qualified Stock Options
Non-qualified stock options do not qualify for tax-advantages that incentive stock options do. That means employees must pay taxes both when purchase shares and when you sell them. With incentive stock options, employees only pay taxes when they sell shares.

Unlike RSUs, which are allocated to employees on a set schedule without the need for them to deploy cash to purchase them, non-qualified stock options require employees to put forth a cash outlay to buy shares.

In addition, stock options fundamentally entail risks. The gains are not guaranteed as with salary, where a paycheck is constant so long as you stay employed.
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Things to Consider When Planning with Non-Qualified Stock Options
When presented with non-qualified stock options, employees should evaluate their company's risks and assess the potential value of their shares, considering both the monetary worth and the percentage relative to the company's total equity. If the offered percentage is minimal or the company's growth prospects are limited, employees might find it more advantageous to negotiate for a higher salary instead.
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How to Calculate Incentive Stock Options
The strike price of a stock option is established based on a company's 409A valuation or fair market value (FMV). If the share value rises over time, there is a potential for profit through the difference (the spread) between your predetermined purchase price and the eventual selling price.
‍

Pros of Non-Qualified Stock Options
Broadly speaking, stock options entail more risk compared to salary compensation, yet they present the possibility of higher rewards in the event of substantial company growth. Compared to incentive stock options (ISOs), non-qualified stock options (NSOs) offer a few advantages. They are not subject to alternative minimum tax (AMT). In addition, they don’t have any holding requirements. What’s more, employees only permitted  to exercise $100,000 of ISOs a year, a limit that does not apply to the more flexible NSOs.
‍

Cons of Non-Qualified Stock Options
Non-qualified stock options do not qualify for tax-advantages that incentive stock options do. That means employees must pay taxes both when purchase shares and when you sell them. With incentive stock options, employees only pay taxes when they sell shares.
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Things to Consider When Planning with Non-Qualified Stock Options
When presented with non-qualified stock options, employees should evaluate their company's risks and assess the potential value of their shares, considering both the monetary worth and the percentage relative to the company's total equity. If the offered percentage is minimal or the company's growth prospects are limited, employees might find it more advantageous to negotiate for a higher salary instead.
‍

Things to Consider When Planning with Non-Qualified Stock Options
When presented with non-qualified stock options, employees should evaluate their company's risks and assess the potential value of their shares, considering both the monetary worth and the percentage relative to the company's total equity. If the offered percentage is minimal or the company's growth prospects are limited, employees might find it more advantageous to negotiate for a higher salary instead.


Tax planning for Non-Qualified Stock Options
Non-qualified stock options are typically taxed twice. Upon exercising non-qualified stock options, you are required to pay taxes on the difference between the market price and the exercise price. This so-termed “compensation element” will be documented as income on your W-2. Subsequently, when you sell the stock, you need to report the capital gain or loss, reflecting the difference between the original market price and the sales price. This information is recorded on Schedule D, Capital Gains or Losses.