Legal Definitions - NQSO

NQSO

NQSO stands for nonqualified stock option. It is a type of stock option that is not eligible for special tax treatment. Nonqualified stock options are usually granted to employees as a form of compensation.

An employee is granted 1,000 nonqualified stock options at a strike price of $10 per share. The current market price of the stock is $20 per share. The employee exercises the options when the stock price reaches $25 per share. The employee will pay taxes on the difference between the strike price and the market price at the time of exercise, which is $15 per share.

This example illustrates how nonqualified stock options work. The employee has the right to purchase the stock at a discounted price, but will have to pay taxes on the difference between the strike price and the market price at the time of exercise.