Layoffs in High-Tech: How to Maximize Profits from Options

More and more companies, especially those operating in the software sector, are carrying out layoffs this year, citing the development of artificial intelligence as the reason, a trend that has been dubbed "AI layoffs."

The wave of layoffs encompasses global giants alongside Israeli technology companies. According to an estimate by Chen Herzog, chief economist at the accounting firm BDO, more than 10,000 employees have been laid off in the Israeli high-tech sector since the beginning of the current year.

Among the major companies conducting layoffs are Wix (1,000 laid off, most in Israel), Monday (630 laid off, more than half in Israel), the gaming company Playtika (500 laid off), the software company Amdocs (3,000 layoffs, of which about 300–400 are in Israel), the American software company ZoomInfo (300 employees in Israel), the cyber company SentinelOne (250), and others.

Laid-off employees are often faced with the question, "What do I do with the options?" — a benefit that is sometimes worth much more than the salary they earned. The significance of this compensation component is highlighted by the estimate from Modi Shafrir, chief strategist for financial markets at Bank Hapoalim: the value of options held by high-tech employees in Israel that are "in the money" was estimated at about 150 billion shekels at the end of last year (excluding private company options). The market indicates that this amount has continued to grow.

Layoffs are an unpleasant event, and many companies want to "sweeten the bitter pill" by offering laid-off employees options such as earlier "vesting" or extending the exercise period from the usual 90 days to 180 days, or even a year or two. However, this waiting can cost quite a bit of money due to the Tax Authority's stance.

What should laid-off high-tech employees know and what should they not give up? Globes asked the experts.

1. Exercise, do not leave in a vesting state

"The most basic thing is to exercise the options into shares. That is, to pay money for them, and not leave them in a state of vesting," explains Adv. and CPA Omer Yaniv, CEO of Psagot Equity. According to him, "usually there are 90 days for this from the date of termination of employment."

Adv. Yair Binyamini, founding partner at Binyamini & Co. and an expert in taxation, clarifies: "There are many cases of people who did not pay 50,000–80,000 dollars to exercise options into shares and then lost millions because the company reached an exit or an IPO."

Asaf Glass, CEO of the employee options company from the IBI Capital group, adds: "I have seen quite a few cases where people were laid off and thought the options had vested, so they would enjoy the shares later, but then they received nothing because the options were not exercised."

2. Beware of early sale

Another recommendation is to wait two years from the date of the options allocation before selling the shares. Exercising before this period violates the terms with the Tax Authority, which jumps the tax on the profit from 25% (capital gains) to up to 50% in high-tech due to the definition of profits as income from labor.

"The capital track of Section 102 of the Tax Ordinance requires that the shares sit with the trustee for 24 months from the allocation. Early sale takes the options out of the benefit track and all the profit becomes income from work. That is, a tax of up to 50% plus National Insurance and health tax, meaning an effective tax of 62%," says Yaniv.

3. The employer's 'gesture' that costs dearly

Many employers offer to extend the exercise window beyond 90 days or perform accelerated vesting. However, this gesture, if made without a prior tax ruling, can cost the employee more than it gives them.

Binyamini explains: "This is the Tax Authority's position since 2017. These changes to the option benefit are considered a violation, so the tax on the sale of the exercise shares will jump to 50%." He notes that employees have two options: file for a tax refund regarding the sale of the shares, or use external financing through companies that lend money for the exercise in exchange for a share of the profit.

4. Direct appeal to the trustee and checking plans

Before taking steps, it is recommended to contact the body managing the options directly (ESOP of Phoenix, IBI Capital, Altshuler, or Psagot).

Glass from IBI Capital says: "Contact the trustee's customer service, state that you are being laid off, and ask about the implications. Have you violated the sale clause after two years, and what are the consequences? Ask how much money you need to bring from home to exercise the options." He also reminds employees to check for ESPP plans, where money was set aside monthly to buy shares at a discount.

5. Do not be ashamed to ask for severance benefits

Adv. Shani Ashkenazi, partner and head of the high-tech and venture capital practice at Amit, Pollak, Matalon & Co., suggests that laid-off employees "negotiate and not be ashamed to ask, for example, for an extension of the notice period and an addition of adjustment months."

She also recommends discussing the waiver of non-compete clauses, the continued receipt of benefits (car, phone) for an additional period, and requesting a letter stating that the termination was due to layoffs rather than performance. She also advises not to skip the hearing process, as legal restrictions on layoffs, such as pregnancy or reserve service, may be discovered during it.