Founders designing their option pool — deciding which grant type to offer new hires, before any single employee's tax situation is even in play.
NSO vs. ISO Stock Options: Which Should Your Company Grant?
A decision founders make once, at plan-design time — not something to leave for your first hire's start date.
See how ISO and NSO grants play out on your actual cap table before you write a single offer letter.
Most "ISO vs NSO" content is written for the person receiving a grant. This one is written for the person deciding what to offer. As a founder, your first decision isn't a personal tax question — it's a plan design question: who on your team is even eligible for an ISO, and does defaulting to NSOs simplify your admin burden enough to be worth it?
Who Legally Qualifies for an ISO (and Who Doesn't)
The IRS restricts Incentive Stock Options to W-2 employees only — advisors, contractors, and board members who aren't employees can only receive NSOs, by law, regardless of what your equity plan says. If your team includes non-employee advisors, part of your pool is already decided for you.
Building the Split Into Your Option Pool from Day One
Once you know who's eligible, the real decision is how much of your pool defaults to ISOs versus NSOs for future hires. Founders typically standardize on ISOs for full-time employees (the $100,000 annual vesting-value limit rarely binds at seed stage) and NSOs for everyone else — advisors, consultants, and contractors — so the pool's structure stays predictable as you scale.
Quick Reference: Setting Up Your Pool
| Grant Recipient | Eligible For | Common Default |
|---|---|---|
| Full-time W-2 employee | ISO or NSO | ISO |
| Advisor / consultant | NSO only | NSO |
| Board member (non-employee) | NSO only | NSO |
| International/remote hire | NSO only | NSO |
Frequently Asked Questions
Can I grant ISOs to my advisors instead of NSOs?
No. The IRS limits ISOs to employees on payroll. Advisors, consultants, and non-employee board members can only receive NSOs, no matter what your option plan document says.
- Check employment status before drafting any grant, not after
- Advisors and contractors default to NSOs automatically
- Misclassifying this can invalidate the ISO's tax treatment entirely
Does the ISO vs. NSO split affect how I set up my option pool size?
Not the total size, but it affects the paperwork. ISO grants require tracking the $100,000 vesting-value limit per employee per year; NSOs don't. Most seed-stage pools default to ISOs for employees to keep this simple.
- Track the $100,000 limit per employee if you grant ISOs
- NSOs skip that limit but trigger withholding at exercise
- Document your default policy once, in your equity plan, not per-hire
The Lovie Advantage
Pulley and most competitors explain the ISO/NSO difference in isolation, but founders need to decide this while setting up their option pool — not after reading a glossary entry. Internal Link: Lovie Cap Table Management lets you model both grant types directly against your real pool size and vesting schedule as part of formation, so the decision is baked into your cap table from day one instead of retrofitted later.
Deciding this at the company-policy level rather than grant-by-grant? See Internal Link: Should Your Company Default to ISOs or NSOs? for the admin-cost tradeoffs. For the legal eligibility rules, Delaware's Division of Corporations is a useful reference when drafting your equity plan.
Model Your Option Pool in Lovie
See how ISO and NSO grants play out on your actual cap table before you write a single offer letter. Start Free with Lovie