What you need to know when your business goes public
The recent wave of Israeli tech companies going public on local and international stock exchanges shows no signs of slowing down. ironSource, Monday.com, WalkMe, and Payoneer are just a few examples of startups turning into publicly traded companies. This is a change with many ramifications, both for management and workers, especially when it comes to pay and wages. One of the important changes brought about by an IPO is the requirement for transparency, public scrutiny, and formal approval processes, including with respect to compensation.
“On the corporate side, it’s important to understand that de facto everything becomes public. The company’s financial statements, including salary information for the five highest-paid people in the company, are made public every year. The company is obliged to publish its remuneration policy and cannot deviate from it without the authorization of a general meeting. First-time issuing companies have the possibility of formulating a five-year remuneration policy without having need such approval. Therefore, despite the time pressure to publish the prospectus, it is important to establish a policy that is consistent with the needs of the business, the strategy for the future, and that respects the market standards and Securities Authority requirements, “said Avi Nir, Founder and CEO of CompVision. Decisions about civil servants’ salaries are usually made by a compensation committee and a board of directors and even require, in exceptional cases, the approval of a general at the meeting. Now, not only the founder, the board of directors or the management are involved in determining the salary. ”
The transition from a start-up to a public company also requires significant changes in internal conduct, new managerial routines are created and considerations of public visibility have an important weight in the decision-making process. On the workers’ side, their professional stock could increase thanks to an IPO with competing companies trying to “steal” them. “An IPO is usually a high profile event and the spotlight often brings a wave of seduction from competing companies and recruiters targeting company employees. The company itself is also looking for employees with work experience in public companies, hence another window of opportunity, this time for employees and managers with relevant experience, to join the company ” , said Keren Mangoubi, vice president of CompVison. “In addition, if the main components of the startup’s compensation were salary, benefits and stock options, after the IPO, the options component usually decreases, and sometimes a performance-dependent bonus component is introduced. About six months after the IPO, you can realize the matured capital reward components. ”
As for options, they have become one of the main currencies companies have to offer in an attempt to differentiate themselves in Israel’s competitive tech landscape. “Today’s employees understand that companies are targeting more than ever. A billion dollars worth can allow even a relatively new employee to earn life-changing sums of money, ”said Shelly Hod Moyal, founder of the investment platform iAngels. “When done well, it allows the company to instill a real sense of partnership within an employee. When he or she gets a future share of the success of the business, he or she gets a kind of owner pride, and the more people think of the business as theirs, the more likely they are to make the right decisions for the organization. and stay a part of that for the long haul. To achieve this, the most important principles are transparency and fairness in the creation of an option plan. It is important to communicate simply and clearly what the long-term financial goals of the business are and to help employees understand the potential value of their options to achieve those goals. When it comes to transparency, it’s even worth treating key employees like investors – who invest their energy and time for the success of the business. ”
So what are your options and could they be taxed?
An option that is given to employees is actually a right to buy company stock of a certain nature at a predetermined price and for a fixed term. In most cases, the option cannot be exercised immediately (i.e. the purchase of the share), but only after a vesting period determined in advance and reflecting the general policy of the company. “The purpose of the options is to create an incentive for the employee to join the company and stay there by creating shared interests between the employee and the shareholders of the company, by offering him a stake in the shares of the company. ‘business,’ explained Adv. Oren Sharon, Head of High-Tech Department at S. Friedman & Co.
A company can offer options to its employees at any time, except in special cases. Private companies usually grant options at high rates in their initial stages when cash is scarce or wages are difficult to finance. “Options are a tool in the hands of a company to compensate employees for a lower level of pay than they might have received in another company in a similar position,” said Sharon. As a result, the option rate offered to employees generally decreases as the business progresses and stabilizes and can afford to pay wages and provide appropriate employment terms under market conditions. In addition, there are scenarios in established private companies and public companies where options are granted when the company operates an option program or compensation policy for employees or officers that regulates the terms of options for them. employees to recruit new talent.
The options can only be exercised (ie the purchase of shares) when the agreed period has elapsed in accordance with the conditions made in exchange for the price agreed with the company. “In many cases, there is an increase in options exercised prior to significant events in the company’s lifecycle, such as an ‘exit’ trade, an IPO, or shares purchased from existing holders. of the company (secondary sale), ”added Sharon.
Taxation of options in Israel usually goes through one of two ways – 102 and 3 (9). Track 102 is relevant for employees and business leaders who own less than 10% of the share capital. “In this way, the employee is required to keep his options with a trustee for at least two years. The tax rate that the employee will be required to pay in respect of the sale of shares held in accordance with the provisions of Track 102 is a capital gains tax of 25%, derived from the profit generated by employee from his actions, ”explained Sharon. .
The second route, route 3 (9), concerns anyone who is not classified under route 102 (i.e. those who hold more than 10% of the share capital). “The tax rate on the exercise of options under this route is the tax that the employee is required to pay on the employment income. The tax event in this route is when the options are exercised.” did he declare.