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Non-Qualified Stock Options: What they are, what to consider, and how to maximize them.

February 23, 2023

Non-Qualified Stock Options (NQSOs) are a type of stock option that are not eligible for favorable tax treatment.  This means that the individual that receives the NQSO must pay ordinary income tax on the difference between the exercise price and the fair market value of the stock at the time the option is exercised.

When considering NQSOs, there are several factors to be addressed:

  1. Exercise Price: The exercise price is the price at which you can purchase the stock. It is important to consider if the exercise price is reasonable and is likely to increase in value over time.
  2. Vesting Period: The vesting period is the length of time in which you must meet certain conditions before being able to exercise the option. It is important to understand the vesting period and know when you’ll be able to exercise the option.
  3. Expiration Date: The expiration date is the date after which the option can no longer be exercised.
  4. Stock Price: It is important to consider the price when deciding whether to exercise the option.

To maximize NQSOs, it is important to consider the following:

  1. Time of exercise: You should consider where the stock price currently is. It may be beneficial to exercise the option when the stock price is high to maximize potential profits.
  2. Timing of sale: You should consider the timing between exercising the option and the sale of the stock. It may be beneficial to sell the stock soon after exercising the option to minimize the potential for losses.
  3. Diversification: It may be beneficial to diversify your investments to reduce the potential for losses if the stock price decreases.
  4. Tax planning: It may be beneficial to consult a Financial Advisor to develop a tax strategy that minimizes the tax impact of exercising the option and selling the stock.

NQSOs can be a valuable component of a well-diversified investment portfolio.  However, it is important to carefully consider the factors mentioned above and if needed consult with a Financial Advisor to develop a strategy that maximizes potential benefits of NQSOs while minimizing potential risks.

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