From my understanding (disclaimer: I'm neither a lawyer nor an accountant, but I have been thoroughly advised by both on the topic), there is an important disti

From my understanding (disclaimer: I'm neither a lawyer nor an accountant, but I have been thoroughly advised by both on the topic), there is an important distinction between ISOs (Incentive Stock Options) and NSOs (Nonqualified Stock Options) when it comes to tax implications for the employee. First, ISOs are not taxed at the time of grant or exercise. Instead, they are taxed when the stock is sold. NSOs, on the other hand, are taxed immediately upon exercise on the difference in value between the fair market value of the stock and your exercise price. Second, ISOs are eligible for long-term capital gains treatment so long as the employee holds the stock for at least two years before selling. NSOs are always taxed as income. From the employer perspective, there are implications as well, but I'm less versed on that side of things. It has something to do with tax deductions for the business when issuing NSOs that are not received when issuing ISOs. For more info on this topic, here are a couple of links, but I'd of course recommend talking to a lawyer or accountant if you're serious about the topic: http://www.naffziger.net/blog/2007/03/31/startup-stock-options-isos-vs-nsos/ http://www.naffziger.net/blog/2007/03/31/startup-stock-optio... http://en.wikipedia.org/wiki/Non-qualified_stock_option http://en.wikipedia.org/wiki/Non-qualified_stock_option http://en.wikipedia.org/wiki/Incentive_stock_option http://en.wikipedia.org/wiki/Incentive_stock_option