Unlock Hidden Value: The Essential Guide to Equity Grants in Israeli High-Tech 

israeli high tech tel aviv

Unlock Hidden Value: The Essential Guide to Equity Grants in Israeli High-Tech 

Do you fully understand the equity grant you just received at work? Do you hold stock options or RSUs? Is it in a 102 track or not? Do you hold ISOs or NSOs?  If you are unsure, don’t worry. The vast majority of U.S. citizens employed in Israeli hi-tech don’t understand their RSU or option grants. Let’s save you some money in the next 5 minutes. 

Equity grants such as stock options and Restricted Stock Units (RSUs) are more than mere perks; they’re a significant part of your compensation package. However, the real value and impact of these equity grants often remain shrouded in mystery and, therefore, open to heavy taxes. The first step to making sure you are making the right financial decisions is knowing what it is you are holding. 

 

For instance, navigating the differences between ISOs and Non-Qualified Stock Options (NSOs) or understanding the Israeli tax implications of being in or out of a Sec.102 capital gain trustee track can significantly influence your financial decisions and outcomes. We are talking about potentially paying 87% or 28% in taxes!  

 

The first step in maximizing your take home and minimizing your taxes is knowing what you are being granted. So, let’s dive into the differences between the choices you may get. 

 

Israeli choices: 

 

For Israeli taxes, there are only two or three choices. We will review the primary two options: a 102 trustee capital gain track and a non-102 track. There is also a third 102 track without capital gains, but it is more of a hybrid of the two, and I will not cover it below. 

 

102 Trustee capital gains track: Regardless of how your stock options or RSUs are treated for U.S. purposes if you live and work in Israel, the 102 trustee track is a significant benefit. Your equity is held by a third-party trustee, which isn’t yourself or your employer, and if you wait at least two years from the grant date, if you sell your shares, at least a portion of them should get capital gain treatment. This reduces your Israeli tax from 50% to 28%! 

 

Non-102 track: The main downside is that you will pay ordinary salary-type taxes on your stock options or RSUs. Usually, at exercise for options or vest for RSUs, your income will be subject to ordinary Israeli taxes up to 50%. When you later sell them, the difference in value will be capital gains. Does this mean you always lose out to those in a 102 track? Absolutely not. Not having equity in a 102 track is very beneficial at times. For example, suppose you relocate outside of Israel and want to claim that some of the equity should not be subject to Israeli taxes. In that case, you are in a much better position than if an Israeli trustee is holding your shares and barring you from getting to them without paying the taxes upfront. Additionally, if you want to transfer the shares to a family member, entity, or friend, it can usually only be achieved if it is not held in a 102 plan. 

 

U.S. Choices: 

 

As a U.S. citizen, you may be given several choices, but not every company will offer each one. Sometimes by choosing one of the Israeli options, like being in a 102 plan, may also limit your ability to change how you are treated for U.S. purposes. 

 

When it comes to equity compensation in the hi-tech sector, the two most common forms for U.S. tax purposes are stock options and restricted stock units (RSUs), each with distinct characteristics and implications. Knowing what you are getting is essential because the taxes vary greatly. 

 

Stock Options: Stock options represent the right, but not the obligation, to purchase shares of your company’s stock at a predetermined price, known as the exercise or strike price. In simpler terms, if you work for the next 4 years, you can purchase stock that will hopefully be worth much more than today’s value. 

These are typically offered in two forms: Non-Qualified Stock Options (NSOs) and Incentive Stock Options (ISOs). The allure of stock options lies in their potential to become highly valuable if the company’s stock price increases above the exercise price. However, they carry a risk; if the stock price falls below the exercise price, your options may become worthless, a situation often referred to as being “underwater.” 

 

Most private companies offer options, which is a good indicator to be aware of. If your employer hasn’t yet had an IPO, it is likely that what you are being offered is options.   

Stock options are taxed when they are exercised. That means you may pay $1/option for stock shares worth $4 each. The $3 difference is income to you when you exercise it. Later, you will recognize capital gain taxes for the difference when you sell those shares. 

 

The most important item to note here is that if the exercise price is below the value, they could be sold for in an open market or the [tax jargon warning!] 409a value at grant, then there could be other tax issues that arise. We covered this and more in an earlier post, which you can read here

 

Incentive Stock Options: ISOs are more commonly found offered by U.S. companies. That being said, they are still offered by many Israeli companies and can be in coordination with the Israeli 102 plan. They have specific tax advantages, such as the potential to pay tax at capital gains rates instead of ordinary income rates. However, they come with specific holding period requirements and alternative minimum tax (AMT) considerations. 

 

ISOs are typically only granted to employees, whereas NSOs can also be granted to directors, consultants, and advisors. Exercising ISOs does not create a taxable event for regular income tax purposes (but may trigger AMT), whereas exercising NSOs is taxable as ordinary income. For ISOs, favorable long-term capital gains tax rates apply if shares are held for more than one-year post-exercise and two years post-grant date. NSOs do not have this benefit. 

 

Restricted Stock Units (RSUs): RSUs represent a promise by your employer to grant you a specific number of shares of the company’s stock or the cash equivalent after a certain period, known as vesting. Unlike stock options, RSUs have inherent value unless the company’s stock value drops to zero, as you don’t have to purchase the shares at an exercise price. 

As the RSUs vest, they are considered taxable income for U.S. tax purposes at ordinary income rates, and then when later sold, the further increase in value is treated as capital gains. This means that if you are not careful and hold RSUs in a 102 plan, you could end up paying double taxes. We did more of a deep dive into this issue here

 

RSU grants can sometimes have nuances or slight differences. For example, google offers GSUs instead of RSUs, but they are practically the same. Another trend that is picking up is offering Performance Restricted Stock Units (PRSUs). PRSUs vest similarly but are dependent on the performance of different milestones or company targets. A good indicator, though, is that most public or large hi-tech companies offer RSUs. Therefore, if you are working at Meta, Amazon, Apple, or any public company, it is a good bet that your equity grant will be RSU-based and not stock options. 

 

Knowing what you are being granted: 

 

Understanding what you are being granted is imperative —whether you’re dealing with RSUs, NSOs, ISOs, or/and shares within a 102 plan — it can feel overwhelming. However, this knowledge empowers you to make informed financial decisions and enables you to maximize the benefits from your hard-earned equity compensation. Remember, each type of equity grant comes with its unique set of rules and tax implications, and staying informed is critical to optimizing their potential. 

 

While this post aims to shed light on some of these complexities, it’s important to recognize that every individual’s situation is unique. Professional advice tailored to your specific circumstances can make a significant difference, particularly for nuanced cases like U.S. citizens working in Israel or those navigating different stock options. 

If you need more personalized advice, especially if you’re a U.S. citizen working in Israel, don’t hesitate to contact us

 

Additionally, keep up with the latest trends and updates in equity compensation.  

 




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