ISO, NSO, RSU — what you actually hold

An option — ISO or NSO — is the right to purchase a set number of shares at a price fixed when it was granted. That price is your strike. The option is only worth something if the shares end up worth more than the strike; if they don't, it's described as underwater, and holding it costs you nothing.

An RSU is different in kind. There is no strike and nothing to buy. When it vests, shares are simply yours, which also means there is no decision to make and no way to be underwater.

RSAs and plain common stock are shares you already hold outright, usually from joining very early.

Both are options with a strike price. The difference is how they're taxed. NSOs are the straightforward case: exercising creates ordinary income on the spread between strike and the value at exercise, and it's typically withheld like salary.

ISOs can be more favourable, but they carry a catch that surprises people: exercising may create no regular income tax while still counting toward the alternative minimum tax. It's possible to owe real cash on paper gains from shares you cannot sell. ISOs also come with holding periods and statutory limits that a plan document will spell out.

ISOs can only be granted to employees. If your paperwork says NSO despite an early start date, a lapsed post-termination window or an exceeded limit may have converted them — worth asking about rather than assuming.

Grant type changes the arithmetic everywhere. Options are valued as the spread over strike and floored at zero, so an underwater option shows as no value rather than negative value. Share-settled grants like RSUs are valued at the full estimated price, because there is nothing to subtract.

It also decides which deadlines apply. Options expire and have an exercise window after you leave; RSUs generally do not.