“Employee Options: The Potential Rewards, Risks, and Realities for High-Tech Workers”

2023-05-14 11:57:00

Employee options are a way to reward employees, attract good employees and make them want to work for the specific company. Employee options are accepted in the high-tech sector and are very accepted in the traded companies. These options can be worth a lot of money, there are cases where the options package is worth several times more than the salary itself, there are many cases that have become millionaires thanks to the options. There are quite a few cases of female workers who became millionaires while the friends sitting next to them who arrived half a year later are worth zero. Options are the workers’ way to get rich, but the distribution has a lot to do with timing and luck.

The employees who exercised options in 2020 often profited greatly. The employees who received options in 2021-2022 in most cases hold options that are worth zero. The amazing thing is that in the beginning, at the same time as the tide on Wall Street and especially on the Nasdaq, these options were worth hundreds of thousands of dollars per employee on average. Now in most cases (not all) the options are worth zero. High-tech employees still live on the hope that something will happen in the future, and it is certainly possible, But the naive value of the options in most companies is zero or close to zero – a loss on paper of hundreds of thousands of dollars.

This loss is due to two reasons – first, the weighting. Stock prices were inflated and they returned to a less inflated level. Second – the decrease in the growth rate. Investors value growth and as soon as growth declines, so does value. This is a more significant factor than any other factor in technology companies, and the slowdown in growth in these companies is very damaging to values.

The average high-tech worker lost hundreds of thousands of dollars (on paper)

On the one hand, it hurts to lose hundreds of thousands of dollars, but on the other hand, even the high-tech employees knew that it was money on paper. An option is an option. Yes, there were those who lost their minds and thought they were millionaires and bought apartments, but they are the minority. Most people are disappointed, some are also disgruntled, but there is still hope. The options are still there, if the company recovers, the stock goes up, it could be worth a lot of money again. So there are also those who wait patiently. In two companies – WIX and Fiber the options two years ago were the biggest and most talked about story among the employees of the companies. Today these options are worth zero.

Micah Kaufman Faber, Nir Zohar Weeks. Photo: Yuval Tuag, Shlomi Yosef

WIX Tracking: Options are still worth zero

WIX employee options are worth zero. It was a year ago, and a year and a half ago. The employees ‘took’ a huge blow when the company’s value dropped from $20 billion to less than $5 billion.

Wix employees own 4.3 million shares at an exercise price of $93, the problem is that the stock is at a price of $75. But the options are for a long period – 5.6 years on average, so it is possible that they will return to the money and be worth a significant amount. Currently the naive value is zero, but just for demonstration – if the WIX stock returns to its peak, the options will be worth over 1 billion dollars! And if they return to the price before Corona (very far from the peak), these options will be worth more than a quarter of a billion dollars.

Weeks stock over the past five years

This theoretical calculation does not take into account that there are a large number of allocations, each employee and his exercise price, each employee and the amount of his options. In other words, it is about total potential, but when you refer to the employees and their benefit in options and profit potential, you have to go down to the resolution per employee. For example, employees exercise options in the past year despite the share price. They exercised 209 thousand options at an exercise price of $24. These are probably veteran employees who received options years ago at low prices. Their profit on the realization amounts to close to 10 million dollars.

The new employees are far from receiving options at such a price. In the past year, WIX granted options to employees in the amount of 647 thousand but at an exercise price of 119.6 dollars. It is very far from the money, very far from giving significant economic value to the workers. For their options to go into the money, the stock has to go up 55%. It’s not possible, but these employees have to treat options as something very far away, literally.

At the same time as the options, the companies also distribute restricted shares to employees – RSU – an opportunity for employees to purchase the shares at a 15% discount on the market price, for up to 15% of the salary. This is a nice benefit, if we make it simple – the employees receive 2.25% of their salary as a kind of bonus (15% benefit on 15% of the salary). Not very significant, but certainly worth the money. If you hold the share and it goes up, it can of course be more significant, but there is also a risk – if the share goes down. Therefore, the economic test should be of the inherent benefit only due to the behavior of the stock after the allocation day.

And what is happening at Fiber? The employees at Fiber had options worth more than 800 million dollars as of the peak at which the stock was traded in the middle of 2021. Here too – a very great feeling of wealth for the employees (when the stock traded at a price of over 270 dollars per share). But since then the stock has crashed to just $27 per share, and most of those options are actually worth zero. In order for the employees to benefit from them – Faber’s stock will have to rise significantly.

As of the end of the year, as shown in Faber’s full reports for 2022, the company’s employees have approximately 3.1 million options at an exercise price of $52, for a period of over 5 years. As mentioned, it could get there, but right now it’s presumptuous to treat it as a benefit with value.

During 2022, Faber issued over 500,000 options to its employees at an exercise price exceeding $60, far from the money. Even these employees and in fact most employees probably feel that the options are not really worth anything. But again, similar to what happens at WIX and other companies. We see the average of the realization price, there are also those whose realization price is below the average price. These are mostly older workers.

These employees exercised options in the past year – to the extent of 280,000 options and at an exercise price of close to $13. Apparently they earned over 20 dollars per share (on average), which means a general order of magnitude for the whole of the implementers of about 6 million dollars.