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ISO, NSO, RSU — The Three US Equity Grant Types and Why They Differ

10 Facts About US Equity Comp

Frequently Asked Questions

• What's the difference between ISO and NSO?+
  ISO (Incentive Stock Options) get favourable US tax treatment: no ordinary income at exercise, just AMT impact, then long-term capital gains on the eventual sale if held long enough. NSO (Non-Qualified Stock Options) treat the bargain element as ordinary income immediately at exercise. ISOs are restricted (only employees, USD 100K annual vesting cap, must be granted at FMV strike). NSOs are flexible (contractors, board members, no caps). Both became less common as RSUs took over post-IPO grant practice in the 2010s.
• What is AMT and why does ISO exercise trigger it?+
  Alternative Minimum Tax — a parallel US tax computation designed to prevent high-income taxpayers from zeroing out tax via deductions. ISO bargain element (FMV at exercise − strike) doesn't trigger regular income tax but DOES count for AMT. If your AMTI exceeds the exemption (USD 85,700 single / USD 133,300 married in 2026), AMT kicks in at 26-28%. For senior tech employees with USD 250K+ W-2, even modest ISO exercise can trigger USD 30-50K of AMT owed in cash by April 15 — even if shares aren't sold. The AMT credit recovers some of this in future years.
• What is the 83(b) election?+
  An IRS Form 15620 (formerly Section 83(b) election letter) lets you pay tax on restricted stock at GRANT date FMV instead of at each vesting milestone. For early-stage startup employees, grant-date FMV is often low or zero, so 83(b) means almost no tax at grant and capital gains treatment on subsequent appreciation. Must be filed within 30 days of grant — no exceptions, no extensions. The classic "founder advice" — always file 83(b) on restricted stock or early-exercise options at low FMV.
• How does RSU tax differ from option tax?+
  RSUs have no strike price — at vest, the full FMV is ordinary income on your W-2. The company typically withholds 22% federal at vest ("sell-to-cover"), which is below most senior-employee marginal rates (32-37%), so you usually owe additional tax at filing time. Post-vest appreciation is capital gain (ST/LT based on hold time). Options (ISO/NSO) have strike prices that you pay to exercise — and the spread between strike and FMV at exercise determines tax. RSUs are operationally simpler; options are more tax-flexible.
• Should I exercise ISOs early?+
  Depends on company stage and your liquidity. Pros of early ISO exercise: starts the 1-year LTCG clock, locks in a low bargain element (less AMT), allows 83(b) on unvested shares for cleanest tax. Cons: you're paying real cash for shares that might end up worthless if the company fails, and you risk AMT triggering on illiquid stock. The conservative path: early-exercise ISOs only when (a) strike is very low (early-stage), (b) you can afford to lose 100% of the exercise cost, and (c) you've modelled AMT carefully with this tool or a CPA.
• What's a 409A valuation?+
  409A is an IRS-required independent appraisal of private company stock used to set the strike price for new option grants. Companies must obtain a 409A valuation every 12 months or after any "material event" (funding round, acquisition rumour). The 409A FMV is typically much lower than the preferred-share valuation used in funding rounds — often 20-40% of the preferred price for early-stage companies. This is why employee options at a USD 100/share preferred valuation might have strike prices of USD 25-40. For tax purposes, the 409A is the FMV that matters.
• What happens if my company gets acquired or IPOs?+
  Acceleration provisions in your grant agreement may cause unvested options/RSUs to vest. Double-trigger acceleration (most common at venture-backed startups): vests on (1) acquisition AND (2) you being terminated within X months. Single-trigger (rarer): vests on acquisition alone. IPO triggers different mechanics — typically a 6-12 month lockup before you can sell. Both events typically trigger large tax bills in the year of acceleration; consult a tax advisor before the event happens, not after.
• How do US equity grants compare to other countries?+
  The US ISO is among the most generous tax regimes for employee equity globally. UK EMI (Enterprise Management Incentive) allows up to GBP 250K in qualifying options with 10% capital gains rate. France BSPCE has similar favourable treatment. Germany has qualified-option rules but stricter caps. Singapore offers no special equity-comp tax treatment — options are taxed as ordinary income at exercise (up to 22% marginal). For ASEAN expats moving to US tech jobs, the ISO/RSU economics are usually meaningfully better than equivalent home-country equity treatment.
• Do ASEAN companies grant ISOs or NSOs?+
  ASEAN companies generally don't grant ISOs — that's a US-specific regulatory structure. Singapore, Malaysian, and Indonesian startups typically grant "options" (functionally similar to NSO) or restricted shares with vesting schedules. Tax treatment varies: Singapore options are taxed as employment income at exercise; restricted shares can elect for tax at grant or vest. Some Singapore companies have set up Cayman or Delaware holding companies specifically to issue US-style equity (including ISO-equivalent structures) to attract US-style tech talent. For ASEAN tech employees joining US startups remotely, you typically get US ISO/NSO grants if employed through a US entity, or local equivalent options if employed through a local subsidiary.
• I'm an ASEAN expat with US RSU vesting — what should I know?+
  Three considerations specific to ASEAN expats. (1) If you're on H-1B or other non-resident-immigrant status, your RSU vesting is US-source W-2 income with mandatory federal/state withholding. (2) State tax matters enormously — moving from CA (13.3% top state) to TX (0%) before a large vesting event saves substantial tax; the date of vesting is the date of taxation. (3) If you return to ASEAN long-term, you keep your existing RSU vesting schedule but may owe US tax on each vest as a non-resident — file Form 8233 / W-8BEN appropriately. Many ASEAN tech expats specifically plan their return-home timing to coincide with the end of major vesting cliffs for tax optimisation.

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