Understanding Employee Stock Options: What Every Tech Employee Should Know

Employee stock options can be one of the most valuable — and misunderstood — parts of a compensation package in the tech world. While they can offer significant financial upside, many employees don’t fully understand how taxation, vesting, or dilution affect their real value.

🔹1. How Stock Options Work

When you receive stock options, you’re being given the right (not the obligation) to purchase company shares at a fixed price, known as the strike price. If the company’s value grows, you can later buy the shares at this price and potentially sell them at a profit.

🔹 2. Taxation and “Tax Events”

In Israel, stock options are typically granted under Section 102 of the Income Tax Ordinance, which defines how and when they’re taxed.

• Options held in a trustee plan for at least 24 months are generally taxed at 25% capital gains, rather than income tax.

• Exercising or selling options before that period may trigger income tax and National Insurance.
  

🔹 3. Vesting and Cliff

Most option plans include a vesting schedule — usually four years with a one-year “cliff.”This means you only gain ownership rights gradually, so leaving the company early could reduce or cancel your options.

🔹 4. Dilution – The Hidden Risk

Even if the company grows, your percentage of ownership can shrink if new shares are issued to investors. This is called dilution.Understanding how your company’s cap table (capitalization table) evolves helps you estimate the real value of your shares.

🔹 5. Before You Sign – Ask Questions

Always review:

• The type of plan (102 Trustee / Non-Trustee / Global)

• What is the amount of options and what is the total amount of stock the company has (what is your precentage) - on a fully diluted basis (it means under the assumption all the options that were granted converted to stocks)

• Vesting and expiration terms

• Exercise price and expiration window after leaving the company

💡 Tip: Consult a tax advisor familiar with stock options before exercising or selling. The timing can dramatically change your after-tax gain