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ISO vs NSO

ISO vs NSO: two kinds of option, two tax stories, one cap table

Reviewed August 21, 2026 by Robb

Both are options on the cap table. They are not the same in the tax code. ISOs have rules and a possible tax preference if you hold them right. NSOs are simpler for the company in some setups and ordinary income for the holder at exercise. We are not your tax counsel. We are the people who keep the grant, the vest, and the fully diluted share count from drifting while you talk to counsel.

ISO

ISOs typically fit when

The holder is an employee, you want the statutory form, and you can live with the $100k vesting limit and holding-period rules. Administration is pickier. The cap table still has to show the grant correctly.

NSO

NSOs typically fit when

The holder is a consultant, advisor, or otherwise outside the ISO box, or you have blown a limit. More flexibility. Different tax at exercise. Still vesting, still dilution, still a 409A story.

The pool is the constraint

Founders argue ISO vs NSO and forget they already promised 15% of the company. Model the grant against the pool and the next round’s refresh. That is the finance conversation. Counsel picks the form.

Exercise and cash

Someone exercising writes a check and may owe tax. Early-exercise and 83(b) are their decisions with their advisor. The company still needs a process: notices, 409A, and a table that updates when shares become outstanding.

Do not mix this up in the data room

A lead will ask for the option ledger, not a slogan about ‘employee friendly paper.’ Keep a current export. We treat equity admin as part of the close, not as HR decoration.

Frequently asked questions

Can contractors get ISOs?
Generally no. That is why NSOs exist. Ask counsel before you promise a form in an offer letter.
Does ISO vs NSO change dilution?
Not in the fully diluted count if the share numbers are the same. It changes tax and eligibility. Model the shares either way.
Who should decide?
Counsel on the instrument. Finance on the pool, the 409A, and the ledger. The founder on whether the grant is earned.