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Subject:   NSOs for service providers
Date:   11 Oct 2000
From:   Paul

Thanks for providing a great informational site.

I have a quick question. If a service provider, such as an Advisor or consultant, to an early stage (pre-venture capital, or just about to receive venture capital) company receives NSOs as a form a compensation, is there a tax event at the time of receipt or the time of exercise of the options?

My understanding is that as long as there is no market for the options and therefore no readily ascertainable market value at the time of receipt, then the tax is paid at the time of exercise. Is that correct?

Thanks.

Paul

Answer

Date:   Mon, 04 Dec 2000

Hello Paul,

Yes. There generally is no taxable income when non-qualified options are granted.

Good luck!

Mike Gray

Follow-up Question

Date:   Mon, 04 Dec 2000

Mike,

Thanks. The rest of that answer is "as long as the strike price equals the share value at the time of grant", right??

Paul

Answer

Date:   12 Feb 2001

Hello Paul,

There is no requirement in the Code or Regulations that a non-qualified option should have an option price equal to the fair market value at the date of grant, as there is for ISOs, in order to qualify for deferral of income as of the date of grant.

It is only required that the option not have an ascertainable value. (IRC Section 83(e)(3).)

According to the regulations, any option that is traded on an established market has an ascertainable value.

When an option is not actively traded on an established market, it does not have a readily ascertainable fair market value unless its fair market value can be measured with reasonable accuracy. In order to have an ascertainable value, all of the following conditions must exist.

1. The option is transferable by the optionee;
2. The option is exercisable immediately by the optionee;
3. The option is not subject to any restriction or condition which has a significant effect upon the fair market value of the option; and
4. The fair market value of the option privilege is readily ascertainable in accordance with regulation Section 1.83-7(b)(3).

(Treasury Regulations Sections 1.83-7(b)(1) and (2).)

I hope this helps.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.