Israeli tech cos cutting back on employee share options

Despite the war, salaries for tech workers rose 8% between June 2023 and 2024, higher than the average salary rise of 5.1% for the entire economy. The average monthly salary for a tech in Israel is now NIS 32,215.

But tech companies have become much less generous when it comes to distributing stock options to employees — a bonus mechanism that is very common at startups and growing companies, and which can become large sums if the company is sold or goes public. Furthermore, stock options are only taxed at a rate of 25%, which is significantly low compared to the monthly payroll income tax.

Research conducted by IBI Capital Group, which currently manages more than half of the options market for Israeli technology companies, indicates that the number of options granted to employees in the industry fell during the first half of 2024 by 12.6% compared to the corresponding period in 2023. The sample included 500 companies Private Israeli technology granted options in the first half of this year and in the first half of 2023, which makes it possible to compare them. The research was conducted by valuation firm S Cube, which was founded by Geddy Shalom Bendor and sold to IBI Capital.

Growth plans have been scaled back

“Israeli technology companies have reduced their growth plans, partly due to the consequences of the war and the frequent and prolonged reserve service of employees,” Shalom Bendor tells Globes. “Some have even frozen hiring, so the technology labor market is undergoing changes. Employees are aware of the situation and are inclined to change their jobs.” Less frequently, as a result, companies are protecting their balance sheets and need to invest less in employee retention, thus giving less choice than in the past.

Shalom Bendor points out that the decrease in the number of financing rounds for startups also contributes to the decrease in the number of options given to employees. “Every financing round means dilution for existing shareholders, and since there are fewer financing rounds, there is less need to compensate existing shareholders who are diluted by granting more options.”

The downward trend in the first half of 2024 continues with a similar trend in 2023. According to S Cube, there was a 12.2% decrease in the amount of options granted to employees with respect to 2022. This figure was found in a study of the largest sample of 1,040 companies especially. The decline in medium and large companies was smaller. According to the study, in companies with more than 50 employees who were offered options, there was a 11.52% decline in 2023, while in companies with up to 50 employees, a 13.5% decline was seen in the same year. a period.

The option is incentive because it is guaranteed to the employee at a relatively low price based on the assumption that the value of the stock will only increase – so the employee will pay a discounted price for each share.

But due to the technology industry crisis that began in May 2022 and the flight of many investors from investing in the field, the share prices of private companies fell below the exercise price of their options, in what was called in the industry “going out of the money.” For this reason, many companies adjust option prices at their own expense so as not to cause unrest among employees, but Shalom Bendor reveals that most companies initially abandoned these plans.

“Many companies have considered repricing options, so that the exercise price, for example, dropped from $3 to $1,” he says. “Interest in such a move has been huge in the past two years, but in practice the number of companies that have taken the option has been The move is in the single digits, because it requires a lot of work and effort, the mobilization of legal and financial teams as well as the fear of losing reputation, which sends a bad message to the market that the value is declining, and what is more, this comes at the expense of investors and other shareholders.”

Published by Globes, Israel Business News – en.globes.co.il – on September 30, 2024.

© Copyright Globes Publisher Itonut (1983) Ltd., 2024.