ISOs vs NSOs vs RSAs vs RSUs: How to Pay Early Hires in Equity Without Surprising Them at Tax Time
Collated by Aparna Devalla, CPA
Curated by Rubric Financial
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The Four Instruments at a Glance
- ISO (Incentive Stock Option): preferred for full-time employees because qualifying dispositions get long-term capital gains treatment. AMT exposure on exercise.
- NSO (Non-Qualified Stock Option): used for contractors, advisors, board members, and anyone who can't get ISOs (or for employees beyond the $100K ISO limit). Taxed as ordinary income on the spread at exercise.
- RSA (Restricted Stock Award): actual stock granted upfront, typically subject to vesting. §83(b) eligible. Common for founders and very early hires (employee #1-5) when FMV is low enough to make exercise cost negligible.
- RSU (Restricted Stock Unit): a *promise* to deliver stock at vesting. No tax at grant; taxed as ordinary income when shares settle. Used at later-stage companies because they handle dilution and tax better when FMV is high.
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