Incentive Stock Option - ISO
Categories: Tax, Entrepreneur, Derivatives
See: Stock Option. See: Non-Qualified Stock Option - NSO.
Incentive stock options are used by startups and growing companies to hire workers. These companies can't usually pony up the cash to pay a great salary. Rather than seeing the best guys go to Big Conglomerate, Inc., they offer stock options to sweeten the pot and hopefully make workers overlook the low pay. The idea is that, if the company takes off, the stock options will be worth more than just a salary, even a hefty one.
Example.
A Silicon Valley startup says "We'll pay you $45,000 a yea,r even though you're used to making $100,000. But we'll give you 300,000 ISOs (incentive stock options) at a 4-cent-a-share strike price. If we make it big, you make millions."
Worth it to you? Maybe. You can retire rich. But if the company doesn't do as well as hoped, you'll have put in years of work for lousy pay.