A non-qualified stock option (also written NQSO) is the plain version of an employee stock option. You get the right to buy shares at a set strike price for a set number of years. When you exercise, the spread between the strike and the current value is taxed right then as ordinary income, and your employer withholds on it like a bonus.
Say you hold 5,000 NSOs at a $10 strike and the stock is worth $30. Exercising costs $50,000 in cash and creates $100,000 of taxable income. Your employer withholds at the supplemental rate (22% in 2026, or 37% above $1 million), and the shares you now own have a cost basis of $30. Any later movement is a capital gain or loss.
NSOs are what most people get after they exceed the ISO limit, what contractors and advisors get, and what many later-stage companies grant by default. They are simpler than ISOs and have no AMT surprise, but they are less tax-efficient.
The common mistake is exercising without enough cash for both the strike price and the tax. Many plans allow a cashless exercise, where shares are sold immediately to cover both. Another mistake is letting options expire: they usually lapse 90 days after you leave the company, and some lapse the day you walk out.