Employee Stock Option Cheat Sheet

1	Restricted Stock Units (RSUs) RSUs are company shared granted to employees that vest over time or upon meeting certain conditions. Advantages: No upfront cost to the employee. Provides an incentive to stay with the company. Value is tied to the company’s stock performance. Disadvantages: No control over the timing of vesting. No dividends or voting rights until shares vest. Tax Consequences: When RSUs vest: The value of the stock at vesting is taxed as ordinary income. When sold: Any increase in value after vesting is taxed as capital gains (short-term or long-term depending on holding period). Example: Grant: 500 RSUs granted at $0 cost. Vesting Date: Stock is worth $40 per share when RSUs vest. Ordinary Income: $40 x 500 = $20,000 is taxed as ordinary income. Sale Scenario: After holding for 2 years, the stock is worth $60. The $20 per share gain is taxed as long-term capital gains ($10,000).
2	Non-Qualified Stock Options (NQSOs) NQSOs are options that allow employees to buy company stock at a set price (exercise price) within a specified period. Advantages: Opportunity to purchase stock at a potentially lower price. Can be more flexible than other options. Disadvantages: Must have cash or financing to exercise the option. May lose value if the stock price drops below the exercise price. Tax Consequences: At exercise: The difference between the exercise price and the market price is taxed as ordinary income. At sale: Capital gains tax applies to any additional gains if held after exercise (short-term or long-term based on holding period). Example: Grant: 1,000 NQSOs with a $20 exercise price. Exercise: Stock is worth $50 per share at exercise. Ordinary Income: ($50 - $20) x 1,000 = $30,000 is taxed as ordinary income. Sale Scenario: Stock is sold at $60 per share after one year. The additional $10 per share gain is taxed as long-term capital gains ($10,000).
3	Incentive Stock Options (ISOs) ISOs are a type of stock option that offers favorable tax treatment if certain conditions are met. Advantages: Potential for lower long-term capital gains tax if held for the required period. No regular income tax due at exercise if conditions are met. Disadvantages: Subject to complex holding period rules. May trigger Alternative Minimum Tax (AMT) liability. Annual Limit: Employees cannot receive ISOs for more than $100,000 worth of stock that becomes exercisable in a single calendar year. What Makes ISOs Qualified: The employee must hold the shares for at least 2 years from the date of grant and at least 1 year from the date of exercise. Tax Consequences: At exercise: No regular income tax, but potential AMT liability. At sale: Long-term capital gains if held for required periods. Example: Grant: 1,000 ISOs with a $10 exercise price. AMT Adjustment: ($50 - $10) x 1,000 = $40,000 added to AMT income. Sale Scenario: Stock is sold at $70 per share after holding for 2 years. The entire $60 per share gain is taxed as long-term capital gains ($60,000).
4	Employee Stock Purchase Plans (ESPPs) ESPPs allow employees to buy company stock, often at a discount. Advantages: Discounted stock purchase (usually 5-15%) Easy way to invest in the company. Disadvantages: Risk of stock price declining after purchase. May reduce take-home pay due to payroll deductions. Annual Limit: Employees cannot purchase more than $25,000 worth of stock (valued at the fair market value on the offering date) under and ESPP in a single calendar year. Tax Consequences: At purchase: No tax due. At sale: The tax treatment depends on how long you hold the stock after purchasing it: Qualified Disposition: Discount is taxed as ordinary income, additional gains taxed as long-term capital gains. Disqualifying Disposition: Entire gain taxed as ordinary income. Example: Purchase: 500 shares purchased at $34 (15% discount on $40 price). Sale: Stock is sold at $60 after 2 years. Tax: $6 per share discount taxed as ordinary income ($3,000). The $20 additional gain is taxed as long-term capital gains ($10,000).
5	Section 83(b) Election A Section 83(b) election is a provision under the Internal Revenue Code that allows an employee or founder to choose to be taxed on the fair market value of restricted stock at the time of grant, rather than at the time of vesting. Advantages: Potentially lower tax burden if the stock's value is low at the time of grant an is expected to increase. Future appreciation is taxed at capital gains rates upon sale. Disadvantages: Taxes are paid upfront, even though the stock may never vest or may decrease in value. The election must be filed within 30 days of the stock grant. Example: Grant: 10,000 shares of restricted stock at $0.01 per share. Without 83(b) Election: Taxes are paid as the stock vests, potentially at a higher value. With 83(b) Election: Taxes are paid upfront on the initial value, and future gains are taxed at capital gains rates.

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