Comparison: ISOs/NSOs/RSUs

ISOs, NSOs, and RSUs are the 3 most commonly forms of stock-comp. They're similar in some ways, materially different in others. Here's a side-by-side comparison to fill in the details.

Pre-Read: Key Questions This Article Answers

• What is the difference between an NSO, ISO and RSU?

• What taxes apply to NSOs, ISOs, RSUs, and when?

• What types of stock-based comp are the most common at each company stage?

• Does AMT apply to NSOs, ISOs, and/or RSUs?

Most Commonly Granted at Each Company Stage

Companies need to attract and retain top talent while preserving cash and aligning incentives. Strategic equity compensation programs tailored to a company's developmental phase can help achieve these objectives.

Co. Stage	ISOs	NSOs	RSUs
Startup/Seed	Most Common	Common	Rare
Series A/B/C	Most Common	Common	Uncommon
Late-Stage/Pre-IPO	Most Common	Common	Common
Publicly Traded	Rare	Rare	Vast Majority

Tax Differences at Vesting, Exercise, and Sale

The tax treatment of equity compensation evolves throughout an employee's tenure based on the maturation of the company and the corresponding shift in employee incentives. One must account for both the current and future tax consequences of equity compensation.

Stage	ISOs	NSOs	RSUs
Vesting	No taxes due	No taxes due	Single-trigger: Income tax at vesting Double-trigger (both conditions met): Income tax due upon vesting Double-trigger (both conditions not met): No taxes due upon time-vesting; due with both triggers met
Exercise	No income taxes are due at exercising. May owe AMT tax however (requires a calculation)	Income taxes are owed on the difference (if any) between the FMV and the exercise price	N/A (RSUs cannot be exercised)
Sale	Qualifying Disposition: Long-term capital gains rate for gains above the strike price Disqualifying Disposition: It depends; could be ordinary income and/or short-term capital gains	Sold for a gain: 1-year ownership determines short/long capital gain Sold for a loss: No taxes due + loss can be used to offset other capital gains	If sold after vesting: Largely no tax (will result in a very small short-term capital gain or loss) If held after vesting: 1-year ownership determines short/long capital gain

Taxes Withheld Upon Vesting/Exercise

Equity compensation awards are taxed in different ways depending on the type of award and whether vesting or exercise has occurred and if it is considered a taxable event.

Category	ISOs	NSOs	RSUs
Vesting	No withholding at vesting (not a taxable event)	No withholding at vesting (not a taxable event)	It depends. If taxes are owed (see table above), then funds will be withheld Reminder: If your company is publicly traded, a portion of your vested RSUs will be auto sold (to raise cash required for withholding)
Exercise	No taxes are withheld, but AMT tax may be owed.	Taxes are withheld if there is a bargain element upon exercise.	N/A (RSUs cannot be exercised)

Other Differences Between ISOs/NSOs/RSUs

In order to maximize the utility of equity compensation, it is important to understand the nuanced differences between ISOs, NSOs, and RSUs.

Category	ISOs	NSOs	RSUs
Qualifying/ Disqualifying Dispositions	Yes, ISOs have special rules:	N/A	N/A
AMT Implications	May result in AMT needing to be paid when exercised Reminder: If AMT is paid, you may be able to recoup it in future years.	No AMT implications	No AMT implications
Double Trigger Clause	No	No (unless they have a performance element)	Nearly all RSUs issued pre-IPO are double triggers (learn more here)
Issue Limit	Subject to $100k rule	No limit	No limit