“Business owners can generally offer two different kinds of employee stock option programs to their employees: incentive stock options and non-qualified stock options.
Incentive stock options allow employees to avoid paying taxes on the shares they own until those shares are sold. This provides a deferred-tax incentive for employees, which is another nice benefit. In some cases, the employee may also qualify for a long-term capital gains tax option.
Non-qualified stock options do not share the tax benefits of incentive stock options. However they do have the benefit of being more easily transferred to children than do their incentive stock option counterparts…
If you do decide to offer a stock option program for your employees, your first step should be to consult a professional financial advisor who can guide you through the process and make sure your programs conforms to federal and state laws.”
From this Gaebler Ventures article.