Unlocking Employee Benefits: A Guide to Understanding Stock Options and Tax Implications

In today’s competitive business world, high-tech companies value their employees as their greatest assets and strive to keep them satisfied and connected to the company. 

One unique way they achieve this is through stock option plans, which make employees feel like investors in the company’s success. With Employee Stock Option Plans (ESOPs), employees have the opportunity to purchase company shares at a predetermined price, aligning their interests with the company’s growth. This encourages workers to help the company do well, building a strong bond between them and their workplace.


Navigating Vesting Periods and Exercise Conditions

Typically, options cannot be exercised immediately upon receiving them, as companies spread them out over a vesting period to encourage employee loyalty through gradual exercise. 

Employees must grasp that leaving before options fully vest results in their cancellation. The vesting schedule dictates when options become exercisable.

When you exercise the options and purchase shares of the company, you will have to pay for their exercise a sum of money that was defined in advance on the day the options were granted (Exercise Price). Typically, to benefit from an Employee Stock Option Plan (ESOP), the stock price upon exercising the option must exceed the exercise price specified in the grant document.

The expiration date marks the end of the options agreement between the employer and the employee, rendering it invalid. Typically, this date falls 7-10 years from when the options were granted, contingent upon the employee remaining with the company. If the options are not exercised by this deadline, they become forfeited. Despite seeming distant when first received, it’s crucial to remember this date, as failing to exercise the options within the timeframe could result in significant financial loss.


Maximizing Tax Benefits

Usually, there is no tax on exercising options (depending on the tax section), but tax applies to profits from selling shares. In Israel, most employees benefit from a favorable taxation section called the 102 capital gain route, which imposes reduced taxes under certain conditions. 

These conditions include signing the grant agreement within 90 days and waiting two years from the grant date to sell the stock. 

In a private company, meeting these conditions results in a 25% capital tax on the difference between exercise cost and sale price.

Remember, the tax rate directly affects the money in your bank account. Familiarize yourself with tax regulations and adhere to their conditions to maximize benefits. Trying to “hack” the tax system could result in paying a higher tax rate than if you followed the rules correctly.


The above is provided for informational and general purposes only and should not be considered complete and/or exhaustive information on all aspects involved in employee option programs. The aforementioned does not constitute legal, financial, taxation, economic advice or a substitute for any professional and personal advice. Robyn Capital Ltd. will not be responsible for any loss or damage caused to any third party due to reliance on the above information.

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Robyn Capital is an early stage and growth fund, financing exercising options for startup employees and equity liquidation for founders and shareholders. Robyn takes all the risk from the employee/stockholder, while they keep the shares and future upside.