Advisors, consultants, and board members — people who were offered equity but aren't employees, trying to understand why they're only being offered one type of grant.
Why Am I Only Being Offered NSOs, Not ISOs?
If you're advising, consulting, or sitting on a board without being an employee, this is the reason — and it's not negotiable.
See exactly what an NSO means for you as a non-employee equity holder.
If a company offered you equity as an advisor, consultant, or non-employee board member, you may have noticed it's structured as a Non-Qualified Stock Option, not an Incentive Stock Option. That's not a negotiating position on the company's part — it's a hard legal boundary.
Who Legally Qualifies for an ISO — and Who Doesn't
The Internal Revenue Code restricts ISOs to individuals who are employees of the company at the time of grant. Advisors, independent contractors, consultants, and non-employee directors don't meet that test, no matter how central they are to the business. They can only receive NSOs.
What This Actually Means for Your Grant
Because your grant is an NSO, you'll owe ordinary income tax on the spread between your strike price and fair market value the moment you exercise — there's no deferred, capital-gains-only path the way there might be for an employee's ISO. This is standard, not a sign the company is treating you unfairly.
- Employment status, not seniority, determines ISO eligibility
- NSOs trigger tax at exercise, so plan for that cash outlay in advance
- This applies even if you were a former employee who transitioned to an advisory role
Frequently Asked Questions
Can a company give me ISOs if I'm just an advisor, not an employee?
No. The tax code requires ISO recipients to be employees at the time of grant. If you advise, consult, or sit on a board without being on payroll, you're only eligible for NSOs regardless of what the company might prefer to offer.
- This is a statutory rule, not a company policy choice
- Becoming an employee later doesn't retroactively convert existing NSOs
- Ask specifically about vesting terms, since those are negotiable
Does getting an NSO instead of an ISO mean my equity is worth less?
Not necessarily in value, but the tax timing is different. NSOs tax the exercise spread as ordinary income right away, while ISOs can defer that tax. Factor exercise-time tax into your decision about when to exercise.
- Budget for tax due at exercise, not just at eventual sale
- The underlying share value is set by the company, not the grant type
- Ask whether the company will help with a cashless exercise option
The Lovie Advantage
Founders using Internal Link: Lovie Cap Table Management manage employee and non-employee grants side by side, so advisors and board members always see accurate, compliant NSO terms instead of a generic template that doesn't reflect their actual status.
Hiring internationally instead of adding a domestic advisor? See Internal Link: Equity Grants for International and Remote Hires — the same "employees only" rule applies there too. For the formal legal definitions, the SEC's Office of Investor Education and Advocacy is a solid starting reference.
Understand Your Equity Grant
See exactly what an NSO means for you as a non-employee equity holder. Start Free with Lovie