The upward trend in salaries in Israel's tech industry has been continuing, even since the start of the war, despite a slowdown in recent months, but when it comes to granting options to employees, the picture is completely opposite. The number of options distributed by tech companies in 2024 has fallen 76% since 2021, a study conducted by Altshare for "Globes" has found. Altshare, which controls 40% of the options market in Israel, found that in 2024 over 31 million options were distributed by the company, about half the number distributed in 2023.
An option is a benefit that a company provides to its employees, allowing them to purchase its shares at a fixed and known price after a period of time, such as a year or two years. Options are seen as encouraging employees to invest their full energy in the company and work there for an extended period of time. An option that allows the purchase, for example, of a share worth $1 at a price of only $0.10 constituting a profit of $0.90 per share for those employees. When the company is sold or goes public, the employees immediately receive shares – a bonus on top of their salary.
As for salaries, in contrast, there is a noticeable upward trend. Between October 2023, when the war broke out, and October 2024, salaries in the tech sector rose by 4.7% to a monthly average of NIS 30,915. There were 398,200 salaried jobs in Israel's tech industry in October 2024, up 0.6% from October 2023, despite a slight decrease from September 2024.
Back to a balanced market
The biggest hit, in terms of receiving options, was suffered by enterprise software workers – down 86% between 2022 and 2024; and more surprisingly, cybersecurity employees, whose number of options received fell 90% between 2023 and 2024. The only industry that is currently experiencing a recovery in the volume of options distributed is media and entertainment, with a rise of over 400%, mainly due to the recovery of the Israeli gaming industry and gaming apps.
Altshare founder and CEO Ronen Solomon said, "The rise in interest rates, especially in the US, and the cooling down in the high-tech industry in the last two years also led to a significant decline in the number of options distributed. In 2021, companies reached the salary ceiling that they could pay employees, and they made a lot of money from selling shares (secondary deals) to investors. Many options were distributed to attract them to work in these companies. The big drop brings us back to a healthy and balanced market, where people sit at home for a few days looking for work and don't jump from job to job."
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According to Solomon, concern by foreign investors about increasing investments in Israel has also led to a fall in the number of jobs in the field, which has limited distribution of options. "Global companies are reducing or freezing operations in Israel, Israeli unicorns are moving more jobs abroad, and in addition, fewer startups were founded in Israel last year. 80% of the companies founded by Israelis were registered directly in Delaware."
The research is based on the volume of options and not their value. Companies which carried out a 'split,' and thus artificially increased the numbers of options for each employee, were not included in the research.
The largest number of options distributed over the last four years was in the field of enterprise software, with 113.5 million options distributed. Cybersecurity was in second place with 105 million. In last place was industrial technology and energy with only 14.5 million options distributed. According to Solomon, the explanation for this is the fact that AI programmers work in the software market, and they have expertise that helps maintain their value.
The cybersecurity industry was one of the strongest in Israel last year, with private companies raising 40% of all the capital invested in privately-held tech companies in 2024, according to IVC, LeumiTech and the RISE Israel. Therefore, the dramatic decline in the number of options distributed by cybersecurity companies requires an explanation. Solomon says, "Apparently, not many new programmers joined the cybersecurity industry, so compared to 2023 or 2022, there was no need to grant too many options, and in any case, it is possible that many of them were allocated options for four years in those years, so they did not need to be allocated options in 2024."
Altshare also examined the frequency of distributing options to employees, regardless of their number or value. Here too, there has been a gradual decline in the last four years, although in the fintech sector there was an impressive increase compared with 2023. Apparently, due to the surge in the cryptocurrency and insurtech sector, but possibly also due to the size of the market: the number of fintech companies in Israel is large compared with other sectors.
At the same time as the hike in surtax for the rich
The decrease in the distribution of options coincides with the surtax hike from 3% to 5%. "Employees will have to pay 30% on an exit, which is already a very high rate," says Solomon. "Raising the tax rate doesn't matter to employers, but the employee is already considering whether moving to the US, for example, will help with tax payments, because there every expense is tax-deductible – including expenses for a housekeeper and interest on a mortgage, so the net tax is lower."
However, terms for exercising options are stricter in the US. There, whether or not there is an exit, employees must pay tax from their own pocket. In Israel, an employee who wants to exercise options when the terms are met will be able to sell the shares and pay only 25% capital gains tax – low compared to the maximum of 47% income tax. In the US, every employee who holds options is required to pay taxes upon the maturity of the period for exercise, even if they did not sell the shares. In Israel, over half of tech companies and startups provide option benefits at a price of NIS 0.01 to their employees. An employee who wishes to exercise the option, upon the maturity of the terms, will be able to do so for free, without paying taxes.
Published by Globes, Israel business news – en.globes.co.il – on January 12, 2025.
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