Startup Equity Compensation Guide: ISOs vs NSOs, 83(b), RSUs & 409A

Summary

Startup equity compensation for founders, employees, and advisors: restricted stock and §83(b), ISOs vs NSOs, RSUs, grant-date FMV and §409A, Rule 701, and QSBS — different awards, different tax clocks.

Start with the type of award, what the recipient must pay, and when tax can arise. This guide covers the terms, filings, and records founders and employees need to evaluate before a grant, exercise, or sale.

By Joe Wallin · Editorially updated September 14, 2026

In This Guide

Choose the Award for the Situation
Restricted Stock and the 83(b) Election
Stock Options: ISOs vs. NSOs
Section 409A and Fair Market Value
RSUs in Private Companies
Profits Interests and Phantom Equity
Securities Law: Rule 701 and State Compliance
Equity Compensation and QSBS
Vesting Structures and Repurchase Rights
Advisors and Non-Employee Grants
Implement and Maintain the Plan

01 — Choose the Award for the Situation

The value of startup equity depends on the award terms, dilution, company performance, and the proceeds available to that class in an exit. The legal and tax analysis begins with what the recipient actually receives.

Award	What the recipient receives	Decision to address first
Restricted stock	Actual shares, often subject to a service-based repurchase right	Purchase price, value, and the 83(b) election deadline
Stock option	A right to buy shares at an exercise price	ISO or NSO status, exercise cost, and tax on exercise or sale
RSU	A promise to deliver shares or cash	Settlement timing and cash for withholding and taxes
Profits interest	A partnership interest sharing in future profits or appreciation	Liquidation value, safe-harbor conditions, and partner tax status

These are different instruments. A grant, stock transfer, service-vesting date, exercise, and settlement can occur at different times. Use the relevant section below to map the events for your award.

02 — Restricted Stock and the 83(b) Election

Restricted stock transfers ownership immediately while allowing the company to repurchase unvested shares if service ends. It can be practical at formation when the purchase cost and taxable spread are small.

How Restricted Stock Works

A restricted stock purchase agreement specifies the price, vesting schedule, and repurchase terms. Four-year vesting with a one-year cliff is a common structure; the agreement controls the company’s rights when the recipient leaves.

The recipient is a shareholder from day one. The issued shares belong on the cap table. Voting and dividend rights depend on the stock’s terms and applicable corporate documents. Without a valid Section 83(b) election, dividends paid on substantially nonvested shares generally are taxed as additional compensation. A service-based repurchase right at cost or less can create a substantial risk of forfeiture under Section 83, depending on the actual terms and likelihood of enforcement.

The 83(b) Election: How It Works

Section 83 of the Internal Revenue Code governs the taxation of property transferred in connection with the performance of services. Under the general rule in Section 83(a), absent a valid 83(b) election or another applicable special rule, compensation income equals the excess of fair market value over the amount paid when the stock first becomes transferable or is no longer subject to a substantial risk of forfeiture, whichever occurs earlier. For this purpose, transferability means a transferee can take the stock free of that substantial risk of forfeiture; permission to transfer shares with the forfeiture condition still attached is not enough.

A timely Section 83(b) election instead measures compensation income at the stock transfer: fair market value less the amount paid. It is generally due within 30 days after that transfer. Board approval and the actual transfer need not occur on the same date.

Without an 83(b) election: Assume you receive stock that is both nontransferable for Section 83 purposes and subject to a substantial risk of forfeiture, with no applicable special rule. No compensation income arises at transfer. If the stock remains nontransferable until each tranche vests over four years, compensation income at each vesting date equals that tranche's fair market value minus the purchase price allocable to it. If you paid $0.001 per share and the shares are worth $5.00 per share at vesting, the ordinary income is $4.999 per vested share, taxed at rates up to 37% federally. The tax can arise even if the shares cannot be sold to fund it.

With an 83(b) election: paying $0.001 per share when that is the transfer-date fair market value produces no compensation income with a valid election. Par value alone does not establish fair market value. Later appreciation may produce capital gain on a later disposition if the shares are held as a capital asset, with long-term treatment generally requiring more than one year — do not assume every later dollar automatically receives capital-gain treatment regardless of later events. If the stock is forfeited after a valid §83(b) election, tax paid on the elected compensatory spread is not refunded; any basis/loss consequences follow §83(b) and related rules rather than an open-ended refund. See Section 83(b).

Filing the 83(b) Election: Form 15620 and the E-Filing Portal

Use Form 15620 and the IRS e-filing instructions for the current filing process. Paper filing also remains available.

File within the statutory 30-day period. Section 7503 covers a final day falling on a weekend or legal holiday; specifically applicable disaster or combat-zone postponements require separate analysis. Ordinary reasonable-cause or discretionary late-election relief is unavailable.
Give a copy of the filed election to the issuing company and retain filing evidence.
For transfers on or after January 1, 2016, the election need not be attached to the federal return (T.D. 9779).

For paper filing, establish timely mailing under § 7502 and retain proof. The December 2025 DMM update clarified existing USPS practices: an automated postmark may be later than the day you deposited the envelope. A practical approach is to use USPS Certified Mail at a retail counter, obtain a dated mailing receipt and request a manual postmark. Keep the receipt with a copy of the signed election; a return receipt supplies additional delivery evidence. See USPS’s postmark guidance.

The 83(b) Election Guide covers online filing requirements, who submits the election, spouse questions, and choosing a filing method.

→ It's Time to Reverse the 83(b) Election Presumption

03 — Stock Options: ISOs vs. NSOs

As a company’s value rises, buying restricted stock or paying tax on a grant can become less practical. An option lets the recipient defer the purchase decision, subject to the award’s exercise and expiration terms.

A stock option gives the recipient the right to buy shares at a fixed exercise price. Typical startup options are priced at least at grant-date fair market value and generally produce no income at grant. Later tax timing depends on ISO or NSO status and the exercise and vesting terms. An NSO with a readily ascertainable fair market value at grant is an exception governed by Section 83.

Incentive Stock Options (ISOs)

ISOs are available only to employees (not contractors, not advisors). They offer preferential tax treatment:

At exercise: A qualifying ISO exercise does not itself produce regular taxable income. For substantially vested shares retained beyond the exercise year, the exercise-date spread generally creates an AMT adjustment. If the shares are acquired by exercise and sold in the same tax year, no separate ISO exercise adjustment is required; the sale can still produce ordinary income, and other items may still cause AMT. For early exercise into substantially nonvested shares, the AMT measurement generally occurs when the shares first become transferable for Section 83 purposes or the substantial risk of forfeiture lapses, whichever occurs earlier. A timely 83(b) election for AMT purposes instead measures the spread at the stock transfer on exercise; it must generally be made within 30 days after that transfer.

At sale (if holding periods are met): If you hold the shares for at least two years from the grant date and one year from the exercise date, the entire gain is long-term capital gain — generally taxed at federal long-term capital-gain rates up to 20%, plus the 3.8% net investment income tax when applicable, rather than up to 37% as ordinary income.

If holding periods are not met (disqualifying disposition): A disqualifying disposition generally produces compensation income measured under Section 83. For shares substantially vested at exercise, this generally equals the exercise-date spread. Early-exercised, substantially nonvested shares can instead require a later valuation under Section 83. For a sale or exchange with respect to which a loss, if sustained, would be recognized, compensation income cannot exceed the excess, if any, of the amount realized over the adjusted basis of the shares (§422(c)(2)). Wash sales and certain other dispositions do not qualify for this limitation.

Nonqualified Stock Options (NSOs)

NSOs can be granted to anyone — employees, contractors, advisors. The principal tax rules are:

At exercise: For a typical NSO that was not taxable at grant, exercise into substantially vested shares generally produces ordinary compensation income equal to the exercise-date fair market value minus the exercise price. Employee compensation is generally subject to applicable withholding and employment taxes; the company generally receives a corresponding deduction, subject to §83(h), §162, and other timing and limitation rules — not an automatic deduction in every case. Early exercise into substantially nonvested shares is different: without a timely 83(b) election, Section 83 generally defers compensation income until the shares become transferable for Section 83 purposes or the substantial risk of forfeiture lapses, whichever occurs earlier. Appreciation before that point can become ordinary income. A timely 83(b) election instead measures the spread at the stock transfer on exercise.

At sale: After the Section 83 compensation event, a later sale generally produces capital gain or loss if the shares are held as a capital asset. Measure that gain or loss from the resulting adjusted tax basis, generally the exercise price plus compensation income included under Section 83, rather than automatically using exercise-date fair market value. The holding period generally begins just after substantial vesting, or just after the stock transfer if a valid 83(b) election is made. A sale while the shares remain substantially nonvested without an election can itself produce compensation income.

ISO Statutory Limits

The $100,000 rule: Aggregate the grant-date fair market value of shares underlying ISOs first exercisable by the employee in the same calendar year across all employer, parent and subsidiary plans. Apply options in grant order; only the portion exceeding $100,000 is treated as NSOs.

ISOs require a plan approved by shareholders within 12 months before or after adoption. Grants must occur within 10 years of plan adoption or shareholder approval, whichever is earlier.

The exercise price must be at least 100% of the fair market value at grant (110% for shareholders who, at grant, own stock possessing more than 10% of the total combined voting power of all classes of stock of the employer or any parent or subsidiary corporation, applying attribution rules).

An ISO’s terms must prohibit exercise after 10 years from grant (5 years for shareholders who, at grant, own stock possessing more than 10% of the total combined voting power of all classes of stock of the employer or any parent or subsidiary corporation, applying attribution rules).

The ordinary ISO post-employment period is three calendar months under §422(a)(2), not a universal 90-day rule. Disability and death have statutory exceptions. The award may impose a shorter contractual expiration; an otherwise exercisable option can lose ISO status after the applicable tax-law period.

Before exercising an ISO, model the AMT exposure and the cash available to pay it. The exercise and a later sale are separate decisions; a decline in the shares’ value can leave the holder with tax and little liquidity.

→ Incentive Stock Options: The Qualifications and Limitations

For a practical guide to managing a stock option plan, see Stock Option Plan Administration: A Guide.

04 — Section 409A and Fair Market Value

Section 409A governs nonqualified deferred compensation. For a nonstatutory stock option, the stock-right exemption generally requires an exercise price at least equal to grant-date fair market value and satisfaction of the other exemption conditions. A discounted option must qualify for another exception or comply with the deferred-compensation rules.

How to Get a 409A Valuation

The IRS provides three "safe harbor" methods for establishing fair market value. Once a company has raised priced preferred, the independent appraisal method is the standard: a third-party valuation — from a standalone firm or a cap-table platform's bundled service — typically costs a few thousand dollars and gives the company a presumption of reasonableness. At the earliest stage, though, the often-overlooked illiquid start-up safe harbor lets a qualifying young company rely on a written valuation by a qualified person (who can be an insider) without buying an appraisal at all — see the safe harbor discussion in my 409A guide.

Before a new grant, confirm that the valuation reflects material intervening information and is no more than 12 months old. A financing, major commercial development, or other significant event can require a new assessment sooner. Outstanding options alone do not require an annual valuation refresh.

The Penalties for Getting It Wrong

A supportable valuation is part of compliance. An independent appraisal is one safe-harbor route; its absence alone does not establish a failure, and having one does not excuse defective award terms or operation.

A §409A failure can accelerate income inclusion for affected vested deferred compensation, impose a 20% additional federal tax, and produce premium interest at the underpayment rate plus one percentage point. The employer can also have reporting and withholding obligations. See §409A(a)(1).

The additional tax can fall on the recipient even if the recipient did not set the exercise price.

Arrange the valuation before approving grants, using current financial information, capitalization records, and material company developments. A stale valuation does not automatically invalidate earlier grants; assess each grant on its facts.

→ 409A Valuation: The Complete Startup Guide (2026)

Planning a grant or exercise? Bring the award terms, valuation, and proposed dates to a 20-minute introductory call.

05 — RSUs in Private Companies

How RSUs Work

RSUs are promises to deliver shares or cash. Service vesting and settlement can occur on different dates. Federal income tax generally arises when cash or vested shares are delivered, absent a special rule or earlier §409A inclusion. FICA may have a different timing rule. An 83(b) election cannot be made on an unfunded RSU promise.

Plan for Settlement, Withholding, and Liquidity

An RSU that settles in illiquid shares can create tax without sale proceeds. A properly designed award can separate service vesting from a liquidity condition or a compliant payment date. Review the actual terms, substantial-risk-of-forfeiture rules, §409A and payroll timing; the label “double trigger” is not enough.

Public-market sell-to-cover is often available for public-company shares. A private company needs its own workable withholding and liquidity arrangements, such as a permissible net settlement, employee cash payment or an actual liquidity transaction; none should be assumed available.

For $200,000 of supplemental wages, the optional 22% federal flat withholding method, when available, produces $44,000. Different methods and the 37% rule for supplemental wages above $1 million may apply; FICA is separate. Withholding is not the employee’s final tax liability. Reconfirm the year’s rules in IRS Publication 15.

06 — Profits Interests and Phantom Equity

An LLC taxed as a partnership has several equity-compensation choices. Profits interests are common, but the LLC can also award capital interests, including interests subject to vesting. A capital interest participates in existing liquidation value and can produce compensation income under Section 83; it does not receive the profits-interest safe-harbor treatment merely because it is subject to vesting. Options to acquire partnership interests require their own tax analysis and cannot qualify as ISOs. An LLC can also use contractual phantom-equity or appreciation awards without making the recipient a partner, subject to the applicable tax rules, including Section 409A.

How Profits Interests Work

A profits interest in an LLC taxed as a partnership can share in future operating profits as well as appreciation. It is distinguished from a capital interest by the liquidation-value test: at the applicable testing time, the holder would receive no proceeds if the partnership sold its assets at fair market value and distributed the proceeds in a complete liquidation. For a qualifying service-provider grant under Rev. Proc. 2001-43, that test applies at grant even if the interest is substantially nonvested.

If properly structured, a profits interest is not taxable upon receipt (under IRS Revenue Procedure 93-27 and related guidance), and the holder is treated as a partner for tax purposes going forward. The profits interest holder receives a K-1 and reports their share of the LLC's income.

The key requirements: structure the interest to exclude existing liquidation value, supported by the valuation and distribution provisions; a label or book-up alone does not establish qualification. Tax-free treatment also depends on the conditions of Rev. Proc. 93-27 and, for substantially nonvested grants, Rev. Proc. 2001-43. Rev. Proc. 93-27 does not apply to interests tied to a substantially certain and predictable income stream, interests disposed of within two years of receipt, or limited partnership interests in publicly traded partnerships. Those are limits on the revenue procedure's protection, not the definition of a profits interest. Disguised-payment-for-services rules also require separate review.

Profits interests are popular for LLCs that don't intend to convert to C corporations. But they come with a significant trade-off: a holder treated as a partner of that partnership for tax purposes generally cannot also be treated as a W-2 employee of the same partnership. Subsidiary or disregarded-entity employment structures require separate analysis. Partner status typically affects self-employment tax, health insurance, and other benefits.

Phantom Stock and SARs

Phantom stock grants give the recipient the economic equivalent of equity without actually issuing shares or membership interests. The recipient receives a contractual right to a cash payment equal to the value of a specified number of shares (phantom stock) or the appreciation in value above a base price (SARs).

Cash-settled phantom awards do not issue actual shares, but still need contract, tax, accounting and any applicable securities analysis. A properly designed SAR can qualify for the §409A stock-right exemption; other phantom awards may qualify as short-term deferrals or must comply with §409A. Cash settlement alone does not determine the result.

Phantom equity is sometimes used by companies that want to incentivize key employees without giving up actual ownership — or by LLCs that want to avoid the complications of making employees into partners.

07 — Securities Law: Rule 701 and State Compliance

Every time a company grants equity compensation — stock options, restricted stock, RSUs, or any other equity instrument — it is issuing a security. Offers and sales must satisfy applicable registration requirements or qualify for an exemption. An exemption such as Rule 701 does not eliminate antifraud obligations or applicable state-law requirements.

Federal: Rule 701

For private companies, the primary federal securities law exemption for equity compensation is Rule 701 under the Securities Act of 1933. Rule 701 allows private companies to offer and sell securities under written compensatory benefit plans or written compensation contracts.

Key requirements and limitations:

Eligible recipients: Employees, directors, general partners, officers, trustees where the issuer is a business trust, and qualifying consultants and advisors. Consultants and advisors must be natural persons providing bona fide services that satisfy Rule 701(c)(1); a consulting LLC or corporation does not qualify as the consultant recipient. Rule 701 also accommodates specified family-member transfers by gift or domestic relations order, and its family-member definition includes certain trusts, foundations, and entities. These provisions do not make an ordinary grant to a consulting firm eligible.

Compensatory purpose only. Rule 701 cannot be used to raise capital. If someone is receiving equity primarily as an investment, rather than as compensation for services, Rule 701 doesn't apply. For consultants and advisors, eligible services must not involve offering or selling securities in a capital-raising transaction or directly or indirectly promoting or maintaining a market for the company’s securities.

Plan documents required. You must have a written equity incentive plan (or written compensation agreement), and every recipient must receive a copy of the plan documents.

Mathematical limits. Rule 701(d) applies the greatest of three alternative sales limits: $1 million, 15% of total assets, or 15% of the outstanding class, using the rule’s calculations. The separate $10 million enhanced-disclosure threshold is not a fourth sales limit. Fixed or rolling 12-month periods must be applied consistently. Rule 701(e)’s additional-disclosure threshold is separate from the Rule 701(d) sales limits: options generally measure using grant-date exercise price, with required disclosure before exercise; RSUs are generally treated as sold at grant, with required disclosure before grant. See the Rule 701 guide.

State Securities Laws

You also need a state-level exemption. These vary by jurisdiction:

In Washington, the relevant exemption is RCW 21.20.310(10). A plan that meets the statute’s §401, §422 (including a nonqualified ISO plan adopted with or as a supplement to an ISO plan), or §423 qualification path can rely on that path without the notice filing. Otherwise, the director must be notified in writing, with a copy of the plan, 30 days before offering the plan to employees in this state. A plan limited to a qualifying §422 ISO plan (and a nonqualified ISO plan adopted with or as a supplement to it) can use path (a). A broader omnibus that also grants RSUs, restricted stock, or other awards beyond that supplemental-NSO bucket generally needs the path-(b) notice even if it also authorizes ISOs. Confirm the actual plan documents against the statute and DFI guidance.

In California, Corporations Code §25102(o) provides a compensatory-plan exemption that generally requires a DFPI notice (Form DFPI-260.102.19 / FRANSES) no later than 30 days after the initial issuance of a security under the plan in California, with a filing fee of $200 plus 0.2% of the value of the securities to be exempted (capped at $2,500). Late filing does not itself destroy the exemption but can trigger the maximum fee. Confirm current DFPI instructions before California offers.

Other states have their own provisions, and companies with employees in multiple states need to confirm compliance in each one.

Common Mistake: Granting to Entities

A grant to a contractor's LLC or corporation does not qualify under Rule 701's consultant-and-advisor provision, which requires a natural person. This restriction is specific to that recipient category, not a blanket ban on every entity arrangement covered by the rule. For an ordinary compensatory grant to a consulting entity, identify another available exemption (such as Rule 506(b) for accredited investors) and check the plan’s recipient eligibility and required approvals. Keep a separate cap table ledger for any equity issued outside Rule 701.

→ Rule 701: Who Can Receive Startup Equity, How the Math Works, and the 2026 SEC Guidance

Rule 701 in acquisitions — M&A aggregation of Rule 701 sales for the $10 million disclosure threshold.

08 — Equity Compensation and QSBS

Compensatory C-corporation stock can qualify for §1202 if all statutory conditions are met. Identify the actual stock transfer, applicable acquisition date, holding period and per-issuer gain limit. The $10 million/$15 million regimes depend on statutory acquisition-date rules, including tacking; the issuer’s $50 million/$75 million asset-ceiling transition instead depends on issuance. See the QSBS guide.

Which Forms of Equity Can Be QSBS?

Restricted stock: Original-issue C-corporation shares received for services can qualify if the Section 1202 requirements are met. For substantially nonvested shares, a valid 83(b) election generally starts the stock holding period just after transfer; otherwise, it generally starts just after substantial vesting, potentially tranche by tranche. Substantial vesting means transferability for Section 83 purposes or lapse of the substantial risk of forfeiture, whichever occurs earlier.

Exercised options: The option grant itself does not start a QSBS holding period. For a typical NSO exercised into vested shares, the stock holding period generally starts just after transfer on exercise. An early NSO exercise into substantially nonvested shares follows the restricted-stock rule above. ISOs have separate regular-tax rules under Sections 421–422; an AMT-only 83(b) election does not determine the regular-tax holding period.

RSUs: Vested shares delivered by a C corporation in settlement can qualify if the Section 1202 requirements are met; the RSU grant and service vesting alone do not start the stock holding period.

Profits interests: These are not stock, so they cannot be QSBS. Profits interests are interests in an LLC or partnership, and Section 1202 only applies to C corporation stock.

Identify the Stock Holding Period

The stock holding period and the time spent working for the company are different. For example, assume a post-July 4, 2025 NSO exercise into vested shares starts the stock holding period after the employee has worked for the company for three years. Five years of stock ownership can satisfy the holding-period requirement for the 100% exclusion tier; the three years of prior service do not count. All other qualification and gain-limit requirements still apply.

Apply the acquisition-date regime, including any applicable tacking. Older qualifying acquisitions generally require more than five years; qualifying acquisitions after July 4, 2025 use the 3/4/5-year tiers. The separate long-term capital-gain rule generally requires more than one year. See the QSBS guide.

The Entity Structure Trap

Section 1202 requires stock in a domestic C corporation for federal tax purposes. Stock issued while an S election is effective does not become QSBS merely because the election is later revoked. Interests in an LLC taxed as a partnership or disregarded entity do not qualify as stock of that LLC; an LLC electing C corporation taxation requires a different analysis. A qualifying incorporation or corporate-tax election can begin a potential QSBS holding period, but prior ownership of the business’s assets does not supply that period. All other Section 1202 requirements still apply.

→ The Complete Guide to QSBS & Section 1202

09 — Vesting Structures and Repurchase Rights

Vesting determines how much equity a recipient keeps after service ends. For issued stock, an enforceable repurchase right can limit the stake retained by a departing founder; an option or RSU uses its own cancellation and exercise provisions.

Standard Vesting

The most common vesting schedule in startups is four-year vesting with a one-year cliff. Under this structure:

Nothing vests before the first anniversary under this schedule. If service ends earlier, the award agreement determines cancellation of unvested awards or repurchase of issued shares, including any required payment and exercise deadline.

After one year, 25% of the total grant vests immediately (the "cliff vesting").

The remaining 75% vests in equal monthly or quarterly installments over the next three years.

After four years, the recipient is fully vested.

Founder Vesting

Founder stock is often issued at formation subject to vesting. Set a supportable purchase price and address the 83(b) election under the restricted-stock rules above. A service-based repurchase right at cost can create a substantial risk of forfeiture, depending on its terms and likelihood of enforcement, including the founder’s control over the company.

Founder vesting addresses the risk that a departing founder retains a large ownership stake while others continue building the company. In a financing, investors may negotiate additional vesting, with credit for time already served.

Acceleration Provisions

Single-trigger acceleration: The founder's (or employee's) shares vest automatically upon a change of control (acquisition), regardless of whether they continue working for the acquirer.

Double-trigger acceleration: The shares vest only if there's both a change of control and a termination of the recipient's employment (usually an involuntary termination or resignation for good reason) within a specified period.

Repurchase Rights

The vesting mechanic for restricted stock is typically implemented through a repurchase right, not a forfeiture provision. When a recipient leaves, the company has the right (but not the obligation) to repurchase unvested shares at the lower of the original cost or fair market value. The tax treatment depends on the actual restrictions and any timely Section 83(b) election.

10 — Advisors and Non-Employee Grants

Startups frequently compensate advisors, board members, and independent contractors with equity. The rules differ from employee grants in several important ways.

What Non-Employees Can Receive

Non-employees cannot receive ISOs — those are reserved for employees by statute. Non-employees can receive:

NSOs (nonqualified stock options), restricted stock (with or without an 83(b) election), RSUs (though the 409A issues are more complex for non-employees), or direct stock grants.

Advisory Shares

Advisory shares are typically structured as restricted stock or NSO grants to advisors who provide strategic guidance. Market practice is often in an illustrative range around 0.1% to 1.0% of the company, vesting monthly over one to two years, often with no cliff — these percentages are not legal requirements.

The advisor must be providing bona fide services to the company. Equity grants to advisors who aren't actually doing anything are difficult to justify from both a securities law and a tax perspective.

The Entity Problem

A consultant or adviser entity generally cannot use Rule 701’s natural-person consultant/adviser category. Review another exemption and the plan’s own eligibility and approval rules. Using a different securities exemption does not itself require the grant to be outside the equity plan.

Tax Treatment for Non-Employees

Use the restricted-stock, NSO, or RSU timing rules above for the relevant award; a consultant’s title does not change the instrument. Compensation for independent-contractor services is generally reported on Form 1099-NEC under the applicable reporting rules. Recipients generally handle their own income and self-employment taxes, often through estimated payments. Backup withholding and other special rules can apply, and compensation for prior employee services can remain reportable on Form W-2 after employment ends.

11 — Implement and Maintain the Plan

Assign responsibility for approvals, documents, deadlines, and continuing administration before making the first grant.

The Equity Incentive Plan

An equity incentive plan establishes the available awards, share pool, administrator, and governing terms. Adopt the framework before grants that depend on it. A written compensation agreement can also be relevant under Rule 701; an ISO plan must meet the separate statutory requirements.

Document board approvals and any required shareholder approvals. For ISO treatment, §422 requires shareholder approval of the plan within the statutory window; NSO-only plans turn on corporate law, plan terms, investor documents, and any other applicable requirements rather than a universal federal tax mandate. Confirm recipient eligibility and identify the applicable federal and state securities exemptions.

The Option Pool

Size the option pool around expected hiring and grants over the next 12 to 18 months. Model who bears the dilution from any pool increase negotiated in a financing.

Grant Documentation

The award agreement and approvals should match the actual transaction: recipient, award type, shares, purchase or exercise price, vesting, expiration, and repurchase or settlement terms. Keep the executed documents and cap table consistent.

Ongoing Administration

Before a grant: confirm share availability, recipient eligibility, required approvals, and a supportable current value. Monitor Rule 701 sales limits and disclosure obligations separately.
At a stock transfer or exercise: record the actual date, payment, and shares issued; address any 83(b) election and retain filing evidence.
At service vesting or settlement: apply the award’s terms, process required withholding and payroll reporting, and confirm how any tax will be funded.
When service ends: calculate vested rights, contractual exercise deadlines, the ISO tax-law period, and any repurchase deadline.
Before a financing or sale: reconcile approvals, signed agreements, capitalization, exercise records, and QSBS evidence.

Washington State: How Local Taxes Change the Equity Compensation Equation

Washington adds a state-tax analysis to the federal rules above. The type and year of income, residence and sourcing rules, exclusions, and credits can change the result.

Washington’s capital-gains tax (chapter 82.87) applies 7% to Washington capital gains and an additional 2.9% to the portion above $1 million. The statutory base reflects applicable adjustments and deductions; $278,000 is the standard deduction for tax year 2025, not a current-year assumption. The separate 9.9% personal income tax under ESSB 6346 is scheduled to start January 1, 2028: it starts with federal AGI, applies Washington modifications to reach Washington base income, then allows a $1 million household standard deduction before taxing Washington taxable income at 9.9%. Do not treat $1 million as a simple rate threshold on a single award. See the income-tax guide.

→ How Washington's Capital Gains Tax and the New 9.9% Income Tax Interact

The type of equity you hold determines which Washington taxes apply:

ISOs (qualifying disposition): A qualifying disposition generally produces long-term capital gain. Washington capital gains tax depends on allocation, exemptions, and the deduction for the sale year. Beginning in 2028, RCW 82A.04.210 removes federal long-term gains from the income-tax base, then adds back specified Washington gains plus the capital-gains standard deduction only for taxpayers owing Washington capital gains tax that year. Exempt gains remain excluded. The credit for capital gains tax cannot exceed the income tax otherwise due. Model both taxes using the taxpayer’s full income and applicable deductions.
NSOs: For a typical NSO exercised into substantially vested shares, the spread at exercise is ordinary compensation income. Early exercise into substantially nonvested shares instead follows the Section 83 timing and election rules above; appreciation before the compensation event can remain ordinary income. Later capital gain or loss is measured from the resulting adjusted tax basis. Washington's capital-gains tax concerns long-term gain, subject to allocation, exemptions and deductions. Apply the separate Washington income-tax rules beginning in 2028 to income included in that year's tax base; the applicable deduction is not a separate allowance for each award.
RSUs: Ordinary income arises when cash or vested shares are delivered, not merely when service vesting occurs. Beginning in 2028, that compensation is included in federal AGI and, after Washington modifications, is subject to the 9.9% Washington income tax only to the extent it contributes to Washington taxable income after the household $1 million standard deduction — not merely because the award itself exceeds $1 million. Later appreciation is measured from the resulting tax basis and is a separate capital item, not a second tax on the same compensation dollars. Washington’s capital-gains tax applies to long-term gain, subject to allocation, exemptions and deductions; short-term gain is outside that tax. Special rules and payroll-tax timing require separate review. See my RSU + Washington tax guide for details.
Restricted stock with 83(b) election: A timely election measures ordinary compensation income at the actual stock transfer: fair market value minus the amount paid. The spread may be zero or substantial, and other income matters when applying Washington's income-tax deduction beginning in 2028. Later appreciation generally produces capital gain if the shares are held as a capital asset, measured from the resulting tax basis. Washington's capital-gains tax concerns long-term gain, subject to allocation, exemptions and deductions; do not assume identical treatment to an ISO qualifying disposition. See my 83(b) election guide.
QSBS-eligible shares: If the Section 1202 exclusion applies, the excluded gain currently falls out of Washington's capital gains tax base entirely. This makes QSBS planning even more valuable in Washington.

There is no universal tax-efficiency ranking across these awards. Compare the actual spread, purchase cost, holding period, QSBS eligibility, liquidity, AMT, payroll taxes and applicable state allocation and credit rules. A zero-spread early purchase and a valuable later-stage grant present different choices.

For comprehensive Washington tax planning, visit my Washington State Taxes hub or the Washington Founder Exit Map.

For ongoing equity plan support, see our Stock Option Plan Administration Services — helping startups manage grants, exercises, and equity documentation.

Need Help With Equity Compensation?

I advise companies and equity recipients on award design, grants, exercises, and transaction planning. A short introductory call with startup corporate and tax counsel can establish the issue, timing, and appropriate scope of work.

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A note before you book: please share only the names of the parties and a brief, non-confidential description of your issue. Confidential details should wait until we’ve completed a conflicts check and signed a written engagement agreement.

Washington founders and high earners: get the complete 2026 planning guide covering QSBS, the 9.9% millionaires' tax, PTE elections, and planning strategies before 2028.

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Disclaimer: This guide is provided for informational purposes only and does not constitute legal or tax advice. Equity compensation involves complex and fact-specific rules — always consult with a qualified attorney or tax advisor regarding your particular situation. Joe Wallin is a corporate and tax attorney at Carney Badley Spellman, P.S. in Seattle, Washington.