Tax planning and compliance for investors
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Start of our guide to nonqualified stock options.
Nonqualified stock options are a popular form of equity compensation. Companies like them because they provide a flexible and efficient way to attract, retain and motivate employees (and other service providers, such as directors and consultants). Employees like them because they represent an opportunity to grow wealth, with tax consequences deferred until the year of exercise.
Nonqualified options are usually granted pursuant to a stock option plan that was adopted by the company's board of directors and approved by the shareholders. The board of directors, or a committee appointed by the board (usually called the compensation committee), may decide who receives the awards and the specific terms of the options. In some cases options are granted according to a formula.
When a company grants an option it should provide certain documents. You should receive an option agreement, setting forth the specific terms of your option. If the option is issued under a plan, you should also receive a copy of the plan (or at least access to a copy of the plan), which provides some general rules that govern all options. In many cases the company also provides a summary of the plan.
It's important to understand your rights under the agreement and the plan. You need to know:
Make sure you keep these documents in a safe place. Be sure to review them from time to time for planning purposes. At a minimum, you want to think about your options before the end of each year to determine whether to exercise some or all of the options by December 31 as part of your tax planning.
Here are some of the important terms used in connection with nonqualified options:
Companies have great flexibility in the terms they can offer for nonqualified options. Your option may differ from the typical option in a number of important ways. But it may be helpful to compare your option with the norm:
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