Equitybee is partnering with UI Charitable, a Donor-Advised Fund sponsor built for the way startup employees and founders actually hold wealth. The two companies solve different ends of the same problem. Equitybee helps you unlock the value of startup equity. UI Charitable helps you give from illiquid and private assets. This post is about the second one, and why it matters most in the year your equity pays off.
If you’re a startup employee with stock options, you’ve probably come across the terms ISO (Incentive Stock Options) and NSO (Non-Qualified Stock Options). These terms might sound technical, but understanding the difference is crucial for making informed decisions about your equity.
This guide breaks it all down clearly and simply, covering what each type of stock option is, how taxes play a role, and how they impact your financial situation. Plus, we’ll discuss how solutions like Equitybee can help you fund your stock options.
By the end, you’ll feel more confident navigating ISO and NSO stock options and deciding what to do with yours.
Both ISO and NSO stock options give you the ability to purchase a set number of company shares at a predetermined price (called the strike price) after your options vest. This allows you to own a portion of the company you’ve helped build. However, the two differ significantly in terms of eligibility and tax treatment.
The biggest difference between ISOs and NSOs lies in who can receive them and how they’re taxed. ISOs are generally more favorable tax-wise but come with stricter requirements, while NSOs are more accessible but come with higher tax liabilities.
Taxes play a huge role in deciding how to handle your stock options, especially given how complex and expensive the process can be. Here’s a closer look at how taxes work with each:
Imagine you have:
- 5,000 vested shares
- Strike price: $2.00 per share
- Current Fair Market Value (FMV): $10.00 per share
If you have ISOs: There’s no income tax owed at the time of exercise, but the $40,000 spread may trigger AMT if your full taxable picture indicates liability. If the shares are sold too early (before meeting the required holding periods), the favorable, long term capital gains tax treatment may be lost.
If you have NSOs: The difference between the FMV and strike price creates a taxable event upon exercise. Ordinary income tax is owed on this amount: 5,000 × ($10 - $2) = $40,000 taxable income
The exercise process for both types can create surprising tax implications. Many employees are blindsided by the costs, leading to difficult decisions about whether to exercise at all.
But you don’t have to go it alone. Solutions like Equitybee provide funding that helps you cover both exercise costs and taxes without taking on personal risk to exercise your options.
Scenario 1: Sarah with NSOs
Sarah works at a startup and holds Non-Qualified Stock Options (NSOs). She decides to exercise 2,000 shares at a strike price of $2.00, while the current Fair Market Value (FMV) is $12.00/share.
Taxable income at exercise:
2,000 × ($12.00 - $2.00) = $20,000 This amount is taxed as ordinary income.
Future tax: If she sells the shares later at a higher price, the additional gains will be taxed as capital gains (short- or long-term depending on how long she holds the shares after exercise).
John holds Incentive Stock Options (ISOs) at a startup that’s been steadily growing. He decides to exercise 1,000 shares with a strike price of $1.00, and the FMV is $10.00/share.
Cost to exercise:
1,000 × $1.00 = $1,000
No income tax is due at exercise, but the $9,000 spread (1,000 × [$10 - $1]) may trigger AMT depending on his overall tax situation.
John holds the shares for over 1 year post-exercise and 2 years from the grant date, meeting the ISO holding requirements.
When he sells at $20.00/share, his $10,000 profit (1,000 × [$20 - $10]) is taxed at long-term capital gains rates, which are typically lower than ordinary income tax.
Equitybee is here to make funding the exercise of your stock options stress-free. Here’s how it works:
Apply through Equitybee’s platform. If approved, investors can cover your exercise and tax costs.You become a shareholder without risking your personal savings.If your company exits (or there's another liquidity event), you share a portion of the proceeds with the investors who funded your options. If there’s no exit? You owe nothing.
- No personal financial risk to exercise your options: You don’t take on debt or owe anything if your company doesn’t exit.
- Flexible for all option types: Whether you hold ISOs or NSOs, Equitybee can help you fund them.
- Keep your equity: You retain full ownership of your shares.
ISOs and NSOs may seem complex, but understanding their differences is the first step in building a plan for your equity.
Remember:
- ISOs offer tax advantages but come with specific requirements.
- NSOs are more common but often costlier in terms of taxes.
- Both require planning, especially when it comes to exercising.
Instead of letting costs stop you from owning your hard-earned equity, explore funding options like Equitybee. We’ve helped thousands of startup employees become shareholders in some of the world’s leading companies, including SpaceX, Stripe, and Reddit.
Don’t let the cost of exercising hold you back.
*Equitybee does not offer tax advice and encourages you to speak with your tax adviser about the impact on your specific tax situation.
What a Donor-Advised Fund actually is
A Donor-Advised Fund is a charitable account held by a sponsoring 501(c)(3), in this case UI Charitable. Once you contribute assets, you no longer legally own them, which is what makes the deduction work. What you keep is advisory privilege. You advise how the funds are invested, when assets are sold, and which charities receive grants over time. The deduction happens in the year you contribute. The giving to actual charities happens on the timeline you advise, with no required distributions in any given year.
Stage two: this is where UI Charitable is different, and where it fits startup employees
Here is the part that matters for the way you specifically hold wealth.
UI Charitable allows you to donate long-term appreciated assets such as public stock, private stock, cryptocurrency, etc. to a Donor-Advised Fund, and receive a tax deduction equal to the fair market value of those assets. Startup employees are exactly the people whose appreciated wealth sits in private and illiquid form. UI Charitable can serve the asset class most of the giving world cannot.
One important boundary
To be clear about what does and does not apply. You cannot donate shares that are covered securities by the Equitybee agreement and received by using Equitybee stock option funding. You can, however, donate other appreciated assets to UI Charitable.
*This is not tax advice. Consult a qualified tax professional regarding your specific financial situation.
Case Study: A startup employee in California
How does it actually work? A side-by-side comparison of a startup employee in California.
This same example would work for any appreciated asset donated in-kind.
Startup employee in California
Salary: $350K • Private share value: $1M • Shares donated to a Donor-Advised Fund: $300K (30%)
Getting started
get started with UI Charitable by visiting https://www.uicharitable.org/equitybee
