Founders setting a company-wide default policy — not an individual employee's tax question, but "what should our standard equity plan say."
Should Your Company's Default Equity Plan Use ISOs or NSOs?
This is a policy decision for your equity plan, not a personal tax question for one employee.
Configure your equity plan's default grant type as part of formation, not after your first hire.
Most "ISO vs NSO, which is better" content answers the question for an individual optimizing their own tax bill. Founders are asking a different question: what should our equity plan default to, company-wide, before we make a single hire?
This Is a Company Policy Decision, Not a Personal One
Because ISOs are only available to W-2 employees, most companies write their equity plan to default to ISOs for that group and NSOs for everyone else — advisors, consultants, and international hires — as a blanket policy, rather than deciding grant-by-grant.
The Administrative Cost Difference for Your Team
ISOs require tracking the $100,000 annual vesting-value limit per employee and filing Form 3921 on every exercise. NSOs skip that limit but require payroll withholding at exercise. Neither is objectively "easier" — the right default depends on how your finance function is set up to handle each.
Quick Reference: Setting Company Policy
| Consideration | Favors ISO Default | Favors NSO Default |
|---|---|---|
| Small, US-only employee base | Yes | — |
| Payroll already handles withholding well | — | Yes |
| Heavy advisor/contractor usage | — | Yes (for that group) |
| Simpler year-end filing preferred | — | Yes |
Frequently Asked Questions
Should our startup default to ISOs or NSOs for new hires?
Most seed-stage companies default to ISOs for full-time W-2 employees and NSOs for everyone else, since that split follows the legal eligibility rules automatically. The real decision is how you handle the $100,000 ISO limit as you scale.
- Write the default into your equity plan once, not per hire
- Revisit the policy at each priced round, not just at formation
- Loop in your accountant before finalizing, not after your first grant
Does choosing ISOs as our default create more work for our team?
Somewhat — ISOs require tracking the $100,000 annual limit and filing Form 3921 on each exercise. NSOs shift the burden to payroll withholding instead. Pick based on which process your finance function already handles well.
- Neither option eliminates administrative work entirely
- The right default often comes down to your existing payroll setup
- Cap table software can automate most of this either way
The Lovie Advantage
Deciding this policy inside a static equity plan template means it's disconnected from your actual cap table the moment you start granting. Internal Link: Lovie Cap Table Management lets you set your default grant-type policy as part of formation and see it reflected immediately in every subsequent grant.
Ready to apply this policy to your first hires? See Internal Link: NSO vs. ISO — Designing Your Option Pool for the hands-on setup. For SBA guidance on structuring your business generally, the U.S. Small Business Administration's guide to choosing a business structure is a useful companion resource.
Set Your Default Policy in Lovie
Configure your equity plan's default grant type as part of formation, not after your first hire. Start Free with Lovie