The ongoing wave of layoffs in Israeli and global hi-tech sectors is hitting thousands of employees, and regrettably, they’re not expected to end in the coming months. Those who have been let go are faced with the daunting task of embarking on a new job search while dealing with financial and emotional challenges.
Amid this complex situation lies a significant decision that can change the economic reality of those who have been laid off – a decision worth tens or even hundreds of thousands of shekels: What should be done with your stock options?
Six tips to follow
Here are six tips that will help you put your affairs in order:
1. Back to the beginning: Review your employment contract and your stock-option-allocation agreement. Determine where your options are, and identify the trusted company handling them. Examine the details stated in your options agreement, including the allocation date. Consider the exercise price within the framework of the vesting schedule. Explore the time frame provided immediately after the termination of your employer-employee relationship, along with other relevant factors.
2. Risk management: This is crucial when dealing with multiple stock options and requires an optimal approach. For example, if you know that you need funds as soon as possible, it might be worthwhile to consider selling your stock options at a price that buyers are willing to pay, even if it appears lower than the expected price. Doing so will ensure immediate financial gains.
On the other hand, if you have the luxury of time, it might be worth waiting. Evaluate the extent to which your stock options are “in the money” (i.e., where the sale price exceeds the exercise price) and “out of the money” (where exercising the options currently yields no profit). Also think about whether to sell all of your stock options or leave some for future transactions.
3. Field work: Consult with your managers and colleagues to determine if there is a potential upcoming recruitment round near the company, and familiarize yourself with the company’s policy regarding the sale of employee shares. Explore whether it is possible to sell your options through a secondary round organized by the company (secondary buy), or if you have the opportunity to find your own buyer for the shares you currently possess.
4. Get ready for the sale: Verify that you possess all the necessary documents confirming the allocation of your stock options, including the options agreement, options plan, and information about the trustee overseeing the options plan. Check the status and obtain an up-to-date options report from the trustee. Familiarize yourself with the mechanism for exercising the options and any related procedures.
Maintaining order is essential for executing the options and facilitating the subsequent sale of shares. The more organized you are, the smoother and faster the transaction process will be.
5. Taxes: Be aware that the options were granted under the company’s tax framework in accordance with the income tax and overseen by a tax trustee, carrying certain limitations and implications. It is recommended to consult with the trustee, a tax adviser, and/or an experienced tax attorney to gain a full understanding of the matter. In general, it’s essential not to cut corners because the issue of options and taxation arrangements is complex.
These matters have undergone serious consideration both in terms of legal aspects within the company and taxation regulations. Therefore, taking any detours or shortcuts from the proper procedures may lead to exposure or other potential complications.
6. Adapt to the market: It is clear that the primary goal in exercising options is to optimize the process as much as possible. However, employees who fail to recognize the market’s recent changes and insist on holding out for a high share price may find themselves waiting for an extended period at a different and even potentially significantly lower price level. The challenge lies in the uncertainty of not knowing how long this situation will last and how much further the options may drop. Therefore, waiting or sitting on the fence is similar to taking a position on one side.
Indeed, we are already witnessing a shift in the secondary transactions occurring in the market. On the one hand, sellers are exhibiting more flexibility in negotiations with the company or buyer due to market conditions. On the other hand, they are reluctant to sell all their shares in their possession.
The writer is a managing partner in the secondary fund Amplefields Investments.