In recent years, extensive changes have occurred in the framework of employment agreements between employers and employees. One of the most prominent changes in this field is embodied in employees' agreement to receive stock options in the company where they are employed, in exchange for a certain reduction in salary.
What is an option?
An option is a security issued by a company that allows the holder to purchase a share at a specific price, with the option to purchase the share typically limited until a certain date. Exercising the security is optional, hence its name.
The option holder bears less responsibility and risk than a company shareholder, as they are entitled to refrain from exercising the option if the company's situation does not justify its exercise.
Why do employers offer options to employees?
Employee stock options have become a very common tool, especially in high-tech companies. The reason for this lies in the fact that, unlike other benefits companies offer their employees, such as cars, vacations, and mobile phones, granting stock options allows the company to reward its employees and create an incentive for long-term employment relationships, without spending cash.
Granting the option also provides employees with an incentive to contribute to the company's success, because the greater the company's success, the greater the employee's profit will be upon exercising the option.
Employee Stock Option Agreement - What should I pay attention to?
In accordance with the National Labor Court ruling, it is important to determine in the option plan the number of shares allocated to employees within the framework of the option, the price the employee must pay for the shares, and whether the granting of the option is conditional on special terms, such as setting a minimum employment period, work success, and the like.
The wording of the option agreement will affect the attractiveness of the options and the profitability of the agreement for all parties involved. Therefore, it is very important that the agreement signed with an employee be worded in the most professional manner, in a way that will serve the best interests of all parties. To achieve this goal, it is important to enlist the services of a professional and reputable law firm, specializing in commercial law in general, and in representing high-tech and technology companies in particular.
Taxation of options
Section 2 of the Income Tax Ordinance establishes the various sources of income subject to tax, among which income from employment can also be included. The section has been broadly interpreted by case law to encompass a wide range of benefits provided to an employee by their employer, including options and shares.
Option taxation is a weighty issue. Therefore, it is important to regulate the tax issue that applies to the option plan. It is recommended to consult with an expert professional before making a decision on the matter.
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The law firm Hevri, Kerner & Co. specializes in civil and commercial law. The firm provides legal advice and services for high-tech and start-up companies. The firm was founded in 2010 by attorneys Dov Kerner and Tal Hevri. Since its establishment, our firm has accumulated experience and a reputation for providing extensive legal counsel to technology companies, particularly in labor law, as well as representing a long line of clients in large-scale transactions and complex, high-profile legal proceedings.
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