What are non-qualified stock options?

Question

Most material out there on the internet assumes I already know some basics about stock, but I work for a US-company in the UK, while being from another EU-country. Last month I've received this e-mail from my employer:

"You received 50 non-qualified stock options priced at $30.25. The options will vest over a period of four (4) years, with 25% of the options vesting each year beginning on the first anniversary of the date of grant."

This is the e-mail I received last month. Today the stock is around $4 higher. What do I need to know? My current assumption is that I will have the rights (when vested) to buy the stock of my employer at any time I want for $30.25 and that the best option is to wait a long time to see what stock price will do in the future.

I feel that the stock of my employee could easily be $20 (down) in 3 years and possibly $40, although I don't see that as very likely. Does that mean having these stock options is worth nothing? I've heard by the way that another company might buy us in the future, what would this mean?

Answer 1

Non-qualified stock options are like regular incentive stock options but without the preferential treatments that ISOs get:

• for ISOs, no income occurs when the option is exercised, but for NQSOs you have to report the difference between the exercise price and the market price as income.
• for ISOs, when the stock is sold the entire profit may be (in certain cases) considered long-term capital gains. For NQSOs the regular rules for long-term/short-term capital gains apply.

Companies like to give NQSOs because they can claim a tax deduction (i.e. a loss) for that difference between exercise price and market price (that you have to report as income).