<p>A <strong>Non-Qualified Stock Option (NSO)</strong> is a type of employee compensation that gives the recipient the right, but not the obligation, to purchase a company's stock at a predetermined price, with no special tax treatment upon exercise.</p>

<h2>How It Works</h2>
<p>An NSO is granted with an exercise price, typically equal to the stock's fair market value at the grant date. The recipient can exercise the option at any time up to its expiration date. Upon exercise, the recipient pays the exercise price and receives shares of stock. The difference between the stock's market price and the exercise price is taxed as ordinary income in the year of exercise.</p>
<p>NSOs are subject to vesting schedules, which dictate when the recipient can exercise the option. Vesting can be based on time, performance, or a combination of both.</p>

<h2>Why It Matters</h2>
<p>NSOs are a powerful tool for companies to attract, retain, and motivate employees. They align employees' interests with those of shareholders, encouraging employees to work towards increasing the company's stock price. For example, a software engineer granted 10,000 NSOs with an exercise price of $10 per share, when the stock price is $20, can exercise the options for a $100,000 gain (before taxes). This gain is taxed as ordinary income, but the employee also receives 10,000 shares of stock, potentially worth much more in the future.</p>