Stock Option Plan
(Nonqualified and Incentive Stock Options)

Summary

This Stock Option Plan (Nonqualified and Incentive Stock Options) provides for the grant of both incentive stock options (ISOs), eligible for favorable tax treatment under I.R.C. § 421, and nonqualified stock options (NQSOs) to eligible individuals. This template can be used by a public or private company and includes practical guidance, drafting notes, alternate clauses, and optional clauses. For a full listing of key content covering equity incentive plan considerations, see Equity Incentive Plan Resource Kit. Options that qualify as ISOs can confer significant tax savings to the grantee compared to what would result for an equivalent NQSO grant. ISOs are not taxed on grant, vesting, or (as for NQSOs) exercise. Rather, the holder will have either taxable income or a deductible loss when the holder disposes of the shares acquired through the plan. If the disposition occurs at least one year after the date of exercise and two years after the date of grant, the gain (if any) from a sale of shares will be taxed at long-term capital gain rates. A disqualifying disposition occurs if the holding period requirements are not satisfied, resulting in the loss of the tax-preferred treatment. For additional information, see Equity Compensation Types and Tax Treatment. However, ISOs can only be granted to employees (not non-employee directors, consultants, or other independent contractors, and are subject to statutory limitations and requirements (see Incentive Stock Option Checklist), which may be too restrictive for some companies' purposes as the sole type of option award. Companies that desire to grant stock options to non-employees (e.g., non-employee directors, consultants, and other independent contractors), to grant options beyond the ISO limits, or to grant options without having to meet the ISO requirements can do so through a separate NQSO-only plan (see Stock Option Plan (Nonqualified Stock Options)) or a plan designed to issue both types of options, such as this one. For even more flexible plan designs that allow for NQSOs, ISOs, and other types of equity-based compensation, see Equity Incentive Plan (Private Company), Equity Incentive Plan (Public Company), and Omnibus Incentive Compensation Plan (Public Company). For an ISO-only plan, see Stock Option Plan (Incentive Stock Options). For award agreements that can be used with this plan, see Nonqualified Stock Option Award (Employee), Nonqualified Stock Option Award (Non-employee Director), and Incentive Stock Option Award. For general guidance on equity compensation plans, see Equity Compensation Plan Design for Public Companies and Equity Compensation Plan Design for Private Companies. For additional practice notes, checklists, and templates on equity plans and awards, including drafting, design, securities law, and corporate transaction considerations, see Equity Incentive Plan Resource Kit.