Fundraising
NSO (Non-qualified Stock Options)
Quick definition
Standard employee stock option taxed as ordinary income at exercise on the spread between exercise price and FMV.
NSOs are taxed at exercise: the spread between the strike price and current FMV is treated as ordinary income (subject to payroll tax withholding). On subsequent sale, additional gains are capital gains. NSOs are simpler than ISOs (no AMT issues, no $100K limit) but less tax-advantaged. Common for contractors, advisors, and grants above the ISO $100K threshold.
Related fundraising terms
SAFE (Simple Agreement for Future Equity)
Convertible instrument commonly used for early-stage rounds.
409A Valuation
Independent valuation of common stock used to set option strike prices.
Cap Table
A record of all ownership interests in your company.
Pro Rata Right
An investor's right to maintain their ownership % in future rounds.
Frequently asked questions
- What is NSO (Non-qualified Stock Options)?
- NSOs are taxed at exercise: the spread between the strike price and current FMV is treated as ordinary income (subject to payroll tax withholding). On subsequent sale, additional gains are capital gains. NSOs are simpler than ISOs (no AMT issues, no $100K limit) but less tax-advantaged. Common for contractors, advisors, and grants above the ISO $100K threshold.
- Why is NSO (Non-qualified Stock Options) important for startups?
- NSO (Non-qualified Stock Options) is a fundraising concept that matters for startup founders because it directly affects fundraising readiness, financial decision-making, or operational discipline at the stage where mistakes are expensive to undo. Founders who understand it have a meaningfully easier time in diligence, board meetings, and investor conversations.
- What category does NSO (Non-qualified Stock Options) belong to?
- NSO (Non-qualified Stock Options) is a Fundraising term in the StartupCFO finance glossary — alongside other fundraising concepts that founders, CFOs, and accountants use in daily startup operations and reporting.
- Where can I learn more about NSO (Non-qualified Stock Options)?
- Beyond this definition, see the related fundraising terms below, or explore StartupCFO's insights and tools that put NSO (Non-qualified Stock Options) in context. For specific situations, talk to a fractional CFO who can walk through your numbers.
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