Common use of Exercise of Nonqualified Stock Option Clause in Contracts

Exercise of Nonqualified Stock Option. Generally, subject to Code Section 409A, upon exercising a nonqualified stock option (which can occur if the proper rules for Incentive Stock Options under Section 422 of the Code and accompanying regulations are not followed—see below), the award recipient must recognize ordinary income equal to the excess of the fair market value of the stock acquired on the date of exercise over the exercise price. The income will be treated as compensation income subject to payroll and withholding tax obligations. The Company would be entitled to a compensation deduction in the amount of income recognized by the award recipient.