ISO vs. NSO
The two US stock option types — incentive stock options get favorable tax treatment for employees; non-qualified options are more flexible but taxed less favorably.
Incentive stock options (ISOs) can only be granted to employees (not contractors, advisors, or board members) and offer preferential tax treatment — no ordinary income tax at exercise, and potential long-term capital gains treatment on eventual sale if specific holding period requirements are met — but they're subject to a $100,000 annual vesting value limit and can trigger alternative minimum tax (AMT) at exercise.
Non-qualified stock options (NSOs) can be granted to anyone — employees, contractors, advisors, board members — with no dollar limit, but they're taxed as ordinary income on the spread between strike price and fair market value at the time of exercise, regardless of whether the holder actually sells the shares.
Default to ISOs for employees up to the $100,000 annual vesting limit to give them the most favorable tax treatment, and use NSOs for contractors, advisors, and any employee grants that exceed the ISO limit — get a tax advisor involved before large grants to any senior hire, since AMT exposure on ISO exercise can be a real surprise.
Can contractors receive ISOs?
No — ISOs are legally restricted to employees only; contractors, advisors, and non-employee board members can only receive non-qualified stock options (NSOs).
What's the $100,000 ISO limit?
It caps the value of ISOs (based on fair market value at grant) that can first become exercisable for any one employee in a single calendar year at $100,000 — any excess automatically converts to NSO tax treatment.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.