"non-qualified" stock options

"Qualified" means "qualified for special treatment under the Federal tax code. Among NQOs or NSOs (Non-Qualified or Non-Statutory Options) or NQSOs; ISOs (Incentive Stock Options, which are "qualified"); restricted stock grants; phantom stock; and SARs (Stock Appreciation Rights), among others, there are a lot of way to structure things.

ISOs, which qualify for special treatment, are only available to employees. So if you're a member of the Board or a consultant, you can only get an NQO, not an ISO. ISOs are "qualified" in that if you hold them for 2 years and exercise them a year before you sell the underlying stock, then you will qualify for the gain to be treated as a capital gain, rather than as ordinary income. If, however, you don't meet both criteria, then the ISO is treated as an NQO. An NQO means that the gains are treated as ordinary income, meaning a much, much higher tax rate.

All bad? Well, no, you can also exercise an NQO using an 83(b) early exercise option when the underlying stock is almost worthless. Since the exercise has then occurred, any further gains in the stock that you hold past 1 year are now capital gains, not ordinary income! But there is no 83(b) right; rather, your stock plan must provide for an 83(b) exercise option. There are also other requirements.

Bottom line is that ISOs aren't as good as they seem because they often become NQOs. NQOs aren't as bad as they seem if you are prudent about exercise and purchase and if you have an 83(b) option (which, btw, you can also use on ISOs -- and on restricted stock that vests).

Want more info? https://blog.wealthfront.com/always-file-your-83b/ is helpful and has additional links. Also: http://www.stockoptionadvisors.com/nqsofaq/ and http://www.stockoptionadvisors.com/isofaq/index.html.

Disclaimer: I'm not a CPA or an accountant.