The Covid-19 crisis has been good to tech employees worldwide and this is true of Israel too - the "Startup Nation."
Israel's tech sector employs hundreds of thousands who, over the past year, have benefited from a meteoric, often exponential, rise in their company's share price.
Demand for these companies' products has risen during the pandemic, due to the need for technological solutions that aid remote work and study - communications solutions, infrastructure, cybersecurity, etc. Shares of publicly traded tech companies have soared, due as well to government incentives. As for private companies, many are on their way to Wall Street, via an IPO or SPAC merger). Others are benefitting from increased private placements valuations.
To what extent have high-tech and life sciences employees benefited from the dizzying increase in value over the past year? "Globes" recently analyzed the matter of options held by employees of Israeli tech companies traded on Wall Street. The results show that the earnings on options exercised by employees at these companies in 2020, and that on currently exercisable options, amounts to about $5 billion. (Referring to all employees at these companies, not only Israeli employees).
A leading accounting firm (name withheld by request), has analyzed the issue from a slightly different viewpoint, focusing on tech workers in Israel. The interesting conclusion is that tens of thousands of tech employees in Israel have become millionaires during the past year, on options (shekel or dollar), some of which are fully vested and others still under contractual restrictions.
The same study found a "top line" of about 10,000 relatively high-ranking employees who, over the past year, have increased their worth by a million dollars or more (some of whose options are still "on paper," as mentioned). An additional 10,000-20,000 lower-level employees increased their wealth by NIS 1 million or more.
Nonetheless, a large number of high-tech workers in Israel are not among the lucky ones, and the distribution of wealth is unequal. The division, at most companies, is among management - a small number of employees - who hold about 25% of options; another 40-50 lower-ranking employees holding another 25%; another 200 holding the next 25%, and the remainder holding the last 25%.
These findings could be of great interest to wealth management firms that advise high-net-worth clients about investments and assets management. This increase in wealth for such a large group also has implications about their purchasing power: the amount they will spend on buying apartments, cars and more, and may even affect the entire Israeli real estate market, which has recently experienced a wave of demand and price rises.
Leapfrogging 5-10 years
The same report shows that local high-tech industry growth has speeded up over the past 18 months. In ordinary times, this rate of progress might have taken 5-10 years, but has accelerated due to the pandemic. This too, had an effect on the value of options held by employees.
The study took into account several dozen prominent Israeli technology companies out of about 100 high-tech and life sciences companies traded on Wall Street, as well as 30-35 companies en route to Wall Street and another 40 unicorns (privately-held technology companies valued at over $1 billion).
The analysis indicated that the aggregate market value for several dozen leading Israeli technology companies traded on Wall Street, has more than tripled since the Covid-19 outbreak low point, and now stands at over $200 billion. An increase of several tens of billions of dollars in their aggregate value is forecast for the end of 2021 (given the number of huge flotations planned, including the merger of eToro and Iron Source with SPAC companies traded on Wall Street, valued at about $10 billion each).
Based on these findings, the accounting firm estimates that 8,000-12,000 Israeli high-tech employees are "top line" high-tech earners worth $1 million or more (in practice or on paper). Moreover, they estimate there is a large number of employees - up to 20,000 - who have also benefitted from a handsome if smaller increase (NIS 1 million and up) in the value of their options, in practice and on paper.
One-quarter of all industry benefits go to Wix
A recent Globes analysis found that the Israeli public company with the highest value-added benefit was cloud-based internet services company Wix, with over a quarter of the total benefits calculated for all employees at local Wall Street-traded technology companies. Wix, which employs about 2,300 people in Israel, had a very good year, business-wise, and its share has more than tripled from the March 2020 low, with a current market cap of $17.9 billion.
Wix provides small and medium-sized businesses with solutions that allow them to set up and manage websites easily. When lockdowns in Israel and worldwide led businesses to physically shut their doors, this accelerated their shift online - and Wix benefitted. In total, the amount of options exercised at Wix last year reached about $700 million, with a similar potential amount in the options exercisable by employees, at the end of this year.
At life sciences companies, too, employees benefited from generous stock options in 2020: oncology therapy developer Novocure, which employs about 1,000 people, saw $135 million in options exercised, earning employees $511 million at the end of the year. Novocure recently became the most valuable Israeli company on Wall Street, and is now trading with a market cap of $21 billion, compared with a market cap of less than $7 billion, at the end of March 2020.
Fiverr is another employee stock options star. Fiverr, an online marketplace for freelancers, with a market cap of $7.5 billion, and 550 people employees, with total benefits of $434 million in options. Next in line is renewable energy technology developer SolarEdge, with total benefits of $360 million for more than 3,000 staff members, half of whom are in Israel. SolarEdge's market cap is $13.7 billion.
Cybersecurity company Check Point is another large high-tech employer with about 2,300 employees in Israel, trading at a market cap of $15.8 billion. Two other large Israeli cybersecurity companies traded on Wall Street, Varonis and CyberArk, trade at a similar market cap of about $5.7 billion each; both employ about 600 workers in Israel.
These large Israeli high-tech companies trade on Wall Street, but one also trades in Tel Aviv: NICE Systems Ltd. (Nasdaq: NICE; TASE: NICE). Under CEO Barak Eilam's management, over the past year NICE has become the largest company on the TASE at a higher market cap than Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI). NICE's current market cap is $15.2 billion, compared with $9 billion at the end of March 2020.
Gidi Shalom Bendor, CEO of IBI's S Cube Financial Consulting has been tracking the high-tech industry for years and is deeply familiar with the topic of employee stock options. "There's no doubt that the amounts we're hearing about in high-tech today are very large, unlike anything before, and the population involved is larger than ever before."
"Still, we need to separate between company founders, who can gain millions of dollars, and employees, who can earn a million shekels or dollars from selling options, a quarter of which goes to income tax anyway. For them, this isn't necessarily a life-changing event, and not always even enough to buy an apartment in Tel Aviv. Even when we hear about crazy exits like ironSource, we have to wonder, for example, how much will go to the employees, and how much to employees who aren't senior management."
According to Shalom Bendor, another important distinction is between employees who sell all their holdings as part of an exit or IPO, and those who exercise a portion of their options as part of secondary offering (to bring new investors into a startup), or suddenly find themselves with money following a rise in share price.
"Companies have an interest in retaining their employees, so they will limit the amount of shares they can sell on secondary markets, for example, to 20%. This can be a life-enhancing factor that lowers stress at home; one spouse showing the other how all those years of hard work and sacrifice has paid off. But no more than that.
"On the other hand, when you sell all your options, you can get an amount that allows you to change your priorities in life, make decisions with less pressure and go out, for example, to found that startup you always wanted to, even if you earn no salary in the first year."
In any case, Shalom Bendor warns that big money doesn’t always make the workers who receive it any happier. "From what I've seen, the more you get, the higher your standards. People start looking around at what they've received, comparing themselves to others and what they've got. That's how life goes."
Published by Globes, Israel business news - en.globes.co.il - on May 2, 2021
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