Why this glossary exists
Equity pay can feel like a second language. These short definitions use simple math and realistic examples so you can decode your grant, plan taxes, and avoid avoidable mistakes.
RSUs — what you actually receive and when it’s income
Plain definition: Restricted Stock Units are a promise to deliver company shares when they vest. You owe ordinary income tax at vest on the market value of the shares delivered.
What to watch: Withholding at vest may be too low for high earners. Many people sell some or all shares at vest to cover taxes and diversify.
Quick example:
You vest 250 shares at $160.
- Income added to W-2: 250 × $160 = $40,000
- If 22 percent is withheld but your combined marginal rate is closer to 35 percent, expect to owe more at tax time unless you set cash aside.
Before you decide whether to hold or sell, model the after-tax impact on Nauma with your actual vest dates and tax bracket.
ISOs — incentive stock options and why AMT comes up
Plain definition: Incentive Stock Options let you buy shares at a fixed exercise price. If you meet holding requirements, profit may be taxed as long-term capital gains. The AMT can apply in the year you exercise.
Key AMT idea: The “bargain element” at exercise (market price minus strike) is an AMT preference item. Large exercises can trigger AMT even if you do not sell.
Quick example:
- Strike $10, market $55, you exercise 2,000 ISOs.
- Bargain element: ($55 − $10) × 2,000 = $90,000 → counted for AMT.
- If you later sell after holding long enough, gains may get long-term rates, and you may receive an AMT credit in future years.
Common pitfalls: Exercising late in the year without estimating AMT, or exercising a large block during a price spike.
NSOs — nonqualified stock options in one sentence
Plain definition: Nonqualified Stock Options create ordinary income at exercise on the spread between market price and strike. Later gains or losses after exercise are capital gains.
Quick example:
- Strike $20, market $50, you exercise 1,000 NSOs.
- Ordinary income: ($50 − $20) × 1,000 = $30,000 added to wages.
- If you hold and sell at $55 later, capital gain is ($55 − $50) × 1,000 = $5,000.
When NSOs are simpler: You avoid AMT mechanics, but the immediate wage income can push you into higher brackets.
AMT — the alternative tax that surprises ISO holders
Plain definition: The Alternative Minimum Tax is a parallel tax calculation. For equity, it mainly matters when you exercise ISOs. The ISO bargain element increases your AMT income for that year.
How to think about it: AMT is not “extra forever.” You may build an AMT credit that reduces taxes in later years if your regular tax exceeds AMT.
Quick check: If you plan a big ISO exercise, estimate AMT first. Many split exercises across calendar years to manage exposure.
Vesting — when grants actually become yours
Plain definition: Vesting is the schedule that releases shares or options to you. Common schedules include a one-year cliff then monthly or quarterly vesting.
Why it matters: You cannot sell unvested RSUs or exercise unvested options. For RSUs, vesting is also the taxable moment. For options, vesting is simply the point when you’re allowed to exercise.
Typical timelines:
- RSUs: 4-year grant, 1-year cliff for 25 percent, then monthly.
- Options: similar, but taxes happen at exercise (NSOs) or possibly at sale plus AMT at exercise (ISOs).
NSO vs ISO at a glance
Alt text: small comparison table contrasting NSO and ISO tax events and AMT.
| Feature | NSO | ISO |
| Tax at exercise | Ordinary income on spread | No regular tax at exercise, but AMT may apply |
| AMT risk | Low | Can be high with large bargain element |
| Tax at sale | Capital gains on post-exercise move | Capital gains if holding rules met; otherwise part becomes ordinary |
| Payroll taxes | Often apply on exercise income | Generally not on ISO exercise |
| Planning focus | Cash for exercise taxes | AMT estimation, holding period rules |
Putting it together without the jargon
- RSUs tax at vest. Decide your sell-on-vest rule before dates hit.
- ISOs can be powerful if you plan around AMT and holding periods.
- NSOs are simpler but add wage income when you exercise.
- Vesting dates drive when you can act and, for RSUs, when income hits.
- Keep simple records: grant, vesting, exercises, sales, and withholding. It will save hours in April.
