In simplest terms - stock options gives you the right, but not the obligation, to purchase ownership, or equity, in a company. Head over here if you’re wondering What is equity?

A stock option is the right to buy a set number of shares at a specific price at a point in the future.

Stock options are a form of equity compensation that allows you to buy a specific number of shares at a pre-set price. We offer stock options so you can share in Buffer’s success.

Stock options aren’t actual shares of stock—they’re the right to buy a set number of company shares at a fixed price, usually called a grant price, strike price, or exercise price. Because your purchase price stays the same, if the value of the stock goes up, you could make money on the difference (i.e. this is known as the spread). The hope is you get to sell your purchased shares for more than you paid for them. However, you’re never required to exercise—that’s why they’re called options.

There are two types of stock options: incentive stock options (ISO) and non-qualified stock options (NSO). These mainly differ by how and when they’re taxed.

ISOs could qualify for special tax treatment. ISOs have one of two designations: a qualified or disqualified disposition.

• ISO, Qualified: You must hold the shares for both: Two years from the date your ISOs were granted, and One year after exercising your ISOs. If both conditions are met, the difference between your sale price and the price you paid for the ISOs will be subject to preferential long-term capital gains tax.
• ISO, Disqualified: If you do not meet the qualifications listed above for a qualifying disposition, the sale of your ISOs may be subject to less favorable tax treatment.

With NSOs, you usually have to pay taxes both when you exercise and sell. ISOs qualify for special tax treatment if you hold onto your shares for the required amount of time (at least one year after exercising and two years after your grant date), and you may only have to pay taxes when you sell your shares. However, you could have to pay the alternative minimum tax (AMT) if you don’t sell your shares in the same year you exercise them.

At Buffer, we issue ISOs for US employees and NSOs for all international contractors and international employees.