$35 billion payday awaiting 200,000 Israeli tech employees
Due to the sharp spikes in the stock markets recently, and due to the wave of Israeli companies launching on Wall Street, the value of the options that can be exercised has doubled compared to 2020
Calcalist found that the 200,000 Israeli employees of high-tech companies traded on Wall Street hold options and restricted stock units that are in the money with a total value of $35 billion. There are about 100,000 employees in Israeli companies traded in New York, such as Wix, Fiverr, and Solaredge, as well as a similar group of employees in the local R&D centers of international giants such as Google, Amazon, and Intel, which are also traded on Wall Street. The fact that the restricted stock units and shares options are "in the money" means that one phone call or email to the company's options program manager is enough for the money to reach the employee's bank account, minus taxes.
Due to the sharp spikes in the stock markets recently, and due to the wave of Israeli companies launching on Wall Street, the value of the options that can be exercised has doubled compared to 2020. IBI investment house’s employee compensation management company IBI Capital points out that just five years ago, in 2016, that amount was just below $1 billion.
On average, every employee in an Israeli company traded in New York and every employee at one of the publicly traded multinational companies that run a local office is worth $175,000 on paper. This is of course a very rough calculation because there are dramatic differences between the option packages. Furthermore, the $35 billion figure does not include the latest IPOs, such as ironSource’s, which will produce 200 new millionaires in about six months alone, when the restriction over shares is removed. In addition, about ten more Israeli companies will soon be trading on Wall Street - if by IPO, such as Outbrain and Kaltura , each of which will have a valuation of about $1.5 billion; And if by way of a merger with a SPAC, like REE, who will do so at a value of more than $3 billion. It should be noted that the $35 billion figure does not include the shares of companies’ founders, which hold stock, and not options like ordinary employees.
"In the past year, 1,600 millionaires from publicly traded companies were born. Since the beginning of 2020, we have paid employees an incredible sum of NIS 6 billion (about $1.8 billion) as part of realizations in public and private companies," Tal Dori, CEO of IBI Capital, a subsidiary of IBI Investment House, which specializes in managing remuneration and loyalty programs for high-tech companies, such as Wix, monday.com, ironSource, Taboola, and Intel, told Calcalist. The numbers IBI unveiled speak only to its share of the incentives managing market. A market that includes ESOP, the subsidiary of Excellence Investment House, which is owned by Phoenix Insurance Company, and Benefits, a subsidiary of Altshuler Shaham Investment House.
According to the numbers obtained by Calcalist, since the beginning of 2020, about 7,500 employees in publicly traded companies have activated packages of more than one million shekels (about $300,000). Employees of publicly traded companies make up two-thirds of high-tech workers in Israel, numbering 300,000. Another third, about 100,000 employees, work for private companies and start-ups, of which 70 are unicorns, that is, private companies with a value of over $1 billion.
Half of the unicorns have reached their status since the beginning of 2020. Most fundraising conducted by companies valued at $1 billion or more includes a secondary component. That is the sale of shares to new investors by employees and founders. Since the beginning of 2021, these moves have totaled an unprecedented $2.5 billion, joining the $1.5 billion realized that flowed into employees' bank accounts last year. This is not money on the trees, rather large sums that went into bank accounts, minus an average 30% tax.
The value of the shares of employees in unicorns, whose realization could very well be on the horizon, could be added to the calculation. According to Odelia Pollak, founder and CEO of ESOP, in recent years it has been customary to give 10% of a company's shares to its employees, so if the aggregate value of the 70 unicorns is $100 billion, then the employees have shares worth $10 billion. In other words, 300,000 high-tech employees, which make up 10% of the labor force in Israel, hold options and shares worth close to $50 billion, and this huge sum of money affects Israel and Israeli society in several ways.
1. Who are the new rich? Young men under 40
To understand the implications on the Israeli economy, it is important to have a better understanding of the high-tech worker’s profile. "If five years ago we would meet mostly veteran workers around the age of 50 whose options have finally come to fruition, today, the profile is completely different. These are young people, aged 25-40, 70%, are men," Dori said.
According to him, "the tool of equity compensation has become a necessity in all companies, and there are more and more companies that do not allocate restricted shares but go for option plans distributed to all employees in the company, not as lip service, but in the full sense of the word. Meaning not only engineers and developers get options, but also the cleaning staff."
Dori tells of the wave that is hitting the market. "If in the past a good year was one in which we added ten companies a month to our clientele, or 120 a year, then today we stand at 200 new clients only in the first half of the year. Most companies are private, 50 of them are public." Dori explains the spike by saying that "in Israel, a unicorn is born almost every day."
The expansion of capital remuneration to all levels of workers is what is driving the high-tech market into a frenzy. Although salaries in high-tech, information that is published frequently, are often eye-popping due to their average doubling that of the national average, the high-tech workers themselves are no longer interested in them. The big story for them is the equity reward. Almost every CEO of a high-tech company attests in closed conversations that the salary talks with the employees are focused on the number of options and shares the employee will receive.
Options - rather than a PlayStation, or even a Tesla - are the main weapon in the local “war” over staff. The two main criteria today are the level of interest employees show in the company's activity and its product, and the attractiveness of its stock. You could say that deciding which company to join is more of an investment decision for the employees, and it deals with questions like which company is closer to unicorn status, or who is already in the IPO process and its stock is expected to rise in the foreseeable future?
"Although the numbers have really become inconceivable, and so much is written about scandalous deals, and rightly so. In practice, there is a very large group of start-ups that are not in the game," Pollak said. "The flow of money into Israel is enormous. Most companies allow employees to liquidate holdings because investors want more and more shares, but most of the money goes to the established companies, those that went through round B and up."
HR executives at high-tech companies report quite a few cases where an employee who has already signed a contract with a company that has completed its A round, did not end up working for the company because he suddenly received an offer from a unicorn that is already in the process of an IPO. The speed of reaching a payday often determines the identity of the next employer, especially for the experienced and more senior employees, who also have less time left in the market to locate the next big thing and receive generous option packages for a senior role.
2. What do you do with the money? Hurry to buy apartments
So what do you do with all that money? "A strange situation has arisen today where a large group of people have become a part of the stock market thanks to the shares traded there and they are told to 'deal with it’. They get a lot of money and they have zero knowledge of the market. We work with those employees through presentations, to prevent damages related not only to the performance of the new share in the market, but also to prevent damages related to aspects of taxation. Eventually, a small portion of the employees continue with us and manage their investments. However, most of them are not interested in it and prefer to buy real estate, or invest in other technology companies,” Dori explained.
$35 billion produces a consciousness and a sense of wealth among those who hold this capital on paper, even if they do not realize it immediately. This is reflected in the consumer behavior of those individuals, which also fuels demand for the leisure and restaurant industries. So if one wants to understand why the prevailing estimates are that in the coming years real estate prices and food prices in restaurants will move in only one direction, it is enough to look at that number, $35 billion, to understand.
3. What does the state get? Revenue of $10 billion
If high-tech workers realize all their options at once, the state will also make a big profit. On most options, capital gains tax is paid at a rate of 25%. But some of the options are defined as a benefit within the framework of an employee-employer relationship and are therefore taxed not as capital but as work income, meaning a tax rate of 50%. So the state's revenue can reach $10 billion, which is about a tenth of Israel's annual tax revenue.
This number illustrates the importance of the high-tech sector to Israel. Even before the options and shares, high-tech workers, who make up 10% of the workforce, pay 25% of the taxes that go to the state coffers.
Along with these positive effects, the enrichment of high-tech workers has a long-term effect, which may turn out to be less positive. Since 2018, there has been a trend of a declining number of start-ups. Between 2012 and 2017 the number was higher than a thousand new companies, however, in 2020 it dropped to only 520. It is likely that the uncertainty that accompanied 2020 and the profound change in behavior patterns, led to a deterioration in entrepreneurship, which is the driving engine of the Israeli technology sector. But the industry is already talking about the fact that the impressive capital that hitchhikers are accumulating as employees, is for most of them a negative incentive to risk setting up their own start-up.
On the other hand, in time, perhaps the capital they have accumulated will give these minds the safety that will encourage them to set out on their own. Ironically, a collapse on Wall Street could give a new push for new companies. A large portion of the unicorns that are coming to the stock market these days were established at the height of the financial crisis of 2008, when manpower was more available and cheaper and mainly there were fewer "background noises".
4. What is the danger? Stockholm Syndrome: Techies are in no hurry to cashout
For the state to get the tax revenue in question, employees need to exercise the options. The high-tech industry says that the younger generation suffers from a type of Stockholm Syndrome and is in no hurry to realize the capital it has accumulated. "There are 7,500 people for whom we hold more than a million shekels and they are not selling. They believe in the companies they work for, and until they buy an apartment, they will not sell," says Dori.
Add to this the fact that the average 35-year-old high-tech employee has not yet experienced real declines in the market. Since 2008 the market has been on a more or less continuous rise and in the last two years has been warmly receiving technology companies. Meanwhile, managers say that they are forced to beg employees to agree to investors’ offers and realize at least some of their shares. "I invested three years of my life for NIS 5 million?", Is a real phrase heard in the corridors of high-tech companies.
The technology sector may continue to enjoy unprecedented high tides for a few more years, but at the basic economic level, this is an incorrect diversification of risk, because these workers’ capital is in only one stock, promising as it may be. It is dangerous, and there is no knowing how these workers will react if the market goes down.
5. What does it do to us? Growing gaps and the need to expand the high-tech circle
All Israelis suffer from Stockholm Syndrome to some degree. Until recently, high-tech workers were a kind of nature reserve, in part because it is an industry that allows for some social mobility based on skills, but that it is only allegedly. After all, it is one of the most homogeneous industries. Most of the workers are men who have served in the top intelligence units in the army, and they are the vast majority of development workers.
Covid, which accelerated the digital transformation, also deepened the gap between high-tech and all other sectors and exposed the two separate economies that exist in Israel. The plan of the Minister of Science and Technology, Orit Farkash-Hacohen, to introduce high-tech studies at elementary schools is a step in the right direction.
Programming studies should be as basic as English studies. It is a foreign language that today is an elementary condition for integration into the labor market. It is important to say that not everyone must be a cyber genius. It is enough to be part of a class of worthy programmers to preserve Israel's unique position in the global industry on the one hand and to enjoy the economic fruits on the other.