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In recent months, thousands of workers have been fired from high-tech companies. Many of them hold options to buy stock in the companies they work for. Can these options be used after being fired? How do you determine if it is economically viable and how much tax these workers should pay? With Attorney (CPA) Rachel Guz-Lavi, Managing Partner at Amit, Pollack Matalon & Co. and part of the Tax Department, and Guy Elbaz, GM of EquityBee Israel, we have compiled a guide. Helping people who have been laid off from high-tech companies decide what to do next.
What is the window of opportunity to exercise the options?
First of all, it is important to know that the period for employees to exercise options on layoffs is usually 90 days, which is when option plans are usually prepared. Today, in the current market conditions, laid-off employees may have difficulty finding new jobs, and the option exercise price may be higher than the current stock price. Therefore, employees can completely abandon their options. If the employer company wants to extend the exercise period beyond the date set in the original option plan (usually 90 days), the tax liability will increase from 25% (capital tax) to 47% (marginal tax liability).
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Dismissal of technology
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Using options is an economic decision
“The decision to exercise or leave options is a financial decision and a decision from the investment world. In fact, every employee who decides to exercise the options is making a decision to invest in the company he left – and the first thing you need to ask is whether the company you left will have a successful and successful exit (sale ) or how much do you believe a successful IPO will occur and the amount of investment (the exercise cost of the option) you are willing to risk. The probability of it actually happening?” says Elbaz.
As with any investment, alongside the potential for startup success, there is also risk, as most startups fail. Further complicating the decision to exercise options are market conditions. The uncertainty makes it difficult for even experienced investors to make investment decisions.
In this relatively short period of time, your options are:
1. Exercise options by investing the exercise amount and become a shareholder in the company (higher risk of losing exercise costs, with higher potential returns).
2. Take advantage of options by accepting financing and becoming shareholders in the company (no risk of losing exercise costs, with the possibility of a small profit).
3. Leave the options (zero risk – zero opportunity).
Questions to ask yourself to understand which option is right for you:
1. Do you believe the company will be successful?
2. Is the ransom amount what you stand to lose if the company fails?
3. Does your profit potential match the level of risk?
4. Do you have a better investment option?
To answer these questions, Elbaz suggests thinking about the following issues: “As employees of the company until recently, you should know how it works. It’s true, there were layoffs, but do you think the company is going to a good place? Will it continue to grow in revenue? To profitability. Is it on the way?”
Exercising options at the expense of losing them is not recommended, so you need to ask yourself whether exercising the options will cost you something important and how quickly you can do it. Save this amount again.
How to estimate profit potential
The most difficult task is to estimate the profit potential of implementing the options. In an exit, the profit will be derived from several variables.
1. Choice of Preferred Shares “Liquid Options” – As employees, you hold options for ordinary shares The company’s investors choose preferred shares – for example, priority in the distribution of assets and funds. Therefore, it is very important to understand what are the rights of preferred shares in your company. “In recent years, a common method allows investors to choose whether to receive the amount of their investment or receive dividends as a percentage of their holdings. In such a method, as long as the exit rate is high. Preferred stocks are about 3 times their investment,” Elbaz explained. “The more the distribution system is geared toward preferred stocks, the more important it is for employees with common stock to get out of it.”
2. Put Price and Exercise Cost – In a successful exit where the stock is booked, the profit is calculated as the difference between the stock price and the exercise price of the option. For example, if it costs you $1 per share to exercise an option and the share sells for $10, your pre-tax profit will be $9 per share.
3. To create scenarios, you first need to know how much the company you’re leaving is worth today and the price per share. For example, according to the last fundraising round, the company raised $500 million at a valuation of $5 per share. If the company is selling for today’s price – how much will you earn? You can compare them with similar public companies, find out at what multiple they are trading and what their value is.
Try to assess what investment options you have. Do you have a better investment for the money, perhaps less risky, more leveraged, more liquid? Also, check what your investment portfolio looks like today and if you have an investment portfolio spread between different investments, you are ready to invest the necessary amount of investment and you are exposed to high risk investment in one company.
“A large part of deciding what to do with the options is derived from the personal situation of each employee, so there is no right answer for everyone in this regard and to get as much information as possible, it is important to consult,” says Elbaz.
Is it possible to save options without paying for them?
“For this purpose, the option plan should be examined. If the issuing company has set a non-cash method (net exercise), the value of the exercise supplement can be deducted from the option price, so it will be used without options. For example, if the employee has the right to receive 10 shares worth 1 shekel And if the surcharge per share is 0.5 shekels, in this case the employee can get only 5 shares (instead of 10) and this exercise involves obtaining permission from the tax authorities to implement this method in a public company without paying the surcharge,” says Guz-Lavi.
Can the options be sold or transferred?
In a private company, there is unlikely to be a buyer to buy the options. Also, the transfer of options to another person is considered a sale, and requires payment of tax. As a principle in a public company, stock options can be used and sold on the stock exchange.
Is it possible to accelerate the landing time?
If the company that granted the option wants to accelerate the issuance dates, it will be forced to make a clear request to the tax authority and receive a tax ruling, according to which they will consider the shortened sale date as a new allotment for all shares. The date of departure has changed. However, if the vesting period is changed following the employee’s departure, the tax payable is higher (up to 47%) on distributions that did not reach their due date before the change.
Can the company reduce the exercise price of the options?
“Given the economic situation, some companies whose stock prices have fallen in the recent past want to repeat and reduce the exercise price of options, so that the new exercise price reflects the current stock price. In such a case, Guz-Lavi said that the company’s replacement date is approved by the tax authority. must be submitted, as this will be considered a new assignment date.
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