Introduction to Stock Plans: Non-Qualified Stock Option - 7 Aug, 2009

Introduction to Stock Plans: Non-Qualified Stock Option

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This
is part three of a three-part series introducing different stock plans
one should consider for their business. This is only meant to be an
introduction; a trusted professional should be contacted to discuss
what stock plan is right for your business. This third installment 
focuses on employee non-qualified stock option plans.



A stock option is a written offer from the employer to sell stock to an
employee at a specified price within a specified time period.  A
non-qualified stock option (“NQSO”) is a stock option plan that gives
the option-holder employee the right to purchase shares in the employer
at the grant price (which is the fair market value of the shares as of
the date of grant).  As the employer grows in value, the value of the
stock option rises. Options are generally restricted to a vesting
period before they can be exercised to purchase shares. This
requirement helps the employer retain key employees.



Generally, if the stock option does not have a readily ascertainable
fair market value at the time the option is granted, it is not taxable
income to the employee at the date of grant.  Instead, the option is
treated as taxable income when the employee purchases the option
shares.  The amount of taxable income is the difference between the
fair market value of the shares at the date of purchase and the option
price (the amount the employee pays for the shares).  The employer does
not receive a deduction when the option is granted but, instead,
receives a deduction in the same year as the employee has taxable
income as a result of exercising the option.  The amount of the
deduction is the same as the amount of the employee’s taxable income.

This comes to us from the Pennsylvania Law Monitor - http://palawblog.stark-stark.com/2009/08/articles/business-corporate/introduction-to-stock-plans-nonqualified-stock-option/