Secondary rounds put $1b into Israeli techies' pockets

Tel Aviv Photo: Shutterstock
Tel Aviv Photo: Shutterstock

It doesn't take an exit for tech company employees to cash in, and the ripples are being felt in Tel Aviv's real estate market.

Israel's high-tech industry is currently experiencing an IPO blitz. Major companies like ironSource, SentinelOne, Taboola and eToro - valued at several billions of dollars each - are going public, creating liquidity that enriches their option holders, mostly the employees and the founders, by hundreds of thousands of dollars or more. Now, however, it transpires that employees of privately-held companies - companies that have not been floated or sold - are also benefiting from the current appetite for high-tech. These days, not all exits happen on the stock market. Investment in mature Israeli startups by huge funds like Insight Partners and Softbank has also brought $1 billion-plus (a conservative estimate) to their veteran employees and founders since the beginning of this year.

Benefiting from secondary rounds

The recent huge funding rounds, including the $543 million Series A round by Transmission Security last week, or the $640 million Series E funding secured by Trax in April, are not just a capital injection for growing sales and marketing, and recruiting new employees. The money also goes into the pockets of entrepreneurs, senior managers, veteran employees and investors wishing to realize shares in what is known as a secondary round.

A "Globes" survey found that the amount gained by Israeli startup employees and entrepreneurs in these private funding rounds up to June of this year was about $1 billion after capital gains tax (33% on the profit). This figure does not include the entrepreneurs and employees living abroad, or the investment funds that choose to sell shares. Most of the funds, by the way, have elected to continue investing in companies at a rising valuation, and wait for an exit in the form of an IPO or a sale to another company.

According to one high-tech industry executive, about one-third of all fundraising for later-stage privately-held companies is in the form of secondary rounds and used to purchase shares from the founders and senior managers.

Considering that growth companies have raised about $6.7 billion since the beginning of the year, per Start-Up Nation Central data, the slice of the pie taken by Israeli managers and entrepreneurs will be about $2 billion. Excluding the investment funds and employees living abroad, (comprising about one-third of all management in these companies), the amount of capital pocketed by local high-tech workers was at least $1 billion. If we take into account that small companies have also raised tens of millions of dollars this year, the share taken by employees and entrepreneurs jumps to about $1.3 billion.

How Gush Dan is affected

"There is a broad swathe of entrepreneurs and senior executives at private high-tech companies who've benefited recently from mini-exits during funding rounds, and it's not just in the big companies that have raised hundreds of millions of dollars," Dina Pasca-Raz, Head of the Technology Practice and the International Tax and Transfer Pricing department at KPMG Somekh Chaikin told "Globes". "This phenomenon that we've seen happening at a brisk pace for ten months can also be seen among medium-sized companies raising a rounds in the tens of millions of dollars, where a significant cash component goes to entrepreneurs and senior management as part of a secondary round in return for a sale of shares, alongside the primary round in which cash is injected into the company in return for a share allocation.

"This capital is realized mainly by entrepreneurs on a small fraction of their holdings, and the rapid increase in the value of their companies fills them with optimism. This can whet their appetite to make significant high-value purchases, like buying apartments," says Pasca-Raz. "It's hard to say whether this is a cause of the overall price increase in an economy of nine million people, but if you take that amount and put it into the real estate market in Gush Dan in particular, where it's a scarce resource, there's an effect that we can now see. The tales of real estate agents currently finding apartments for 'techies priced at 10 and 12 million or more, are part of this phenomenon."

Nurit Pirani, Head of LeumiTech Business Center, says the shift in high-tech workers' involvement in real estate began during the last half-year. "Over the past few months, we've seen that entrepreneurs and thousands of high-tech employees can afford to buy an apartment or upgrade their properties to luxury apartments in high-demand areas in the central region and Tel Aviv. The luxury market for multi-million dollar apartments has been fairly calm in recent years, but now it has revived following the large realizations of shares in the technology industry," she says.

Pirani offers an example of a high-tech employee who owned an apartment worth NIS 3 million with a mortgage on it. "He got money from his company and increased his mortgage to buy a NIS 12 million apartment in Tel Aviv. You see this scenario a lot, and also see high-tech workers buying apartments as an investment. You'll often see employees willing to make a large initial down-payment because they have the cash and don't want to make repayments that rise because of index linkage."

Gidi Shalom Bendor, CEO & Founder of S Cube of the IBI Capital group, says his clients have made over $1.5 billion in secondary transactions in the last 12 months. "The volume of our activity has grown by 40%, and we aren't managing to keep up with the demand in terms of handling deals," he says. Aside from the money, the significant factor is the euphoria prevailing in the high-tech industry. "We don't see an end to the high-value IPOs," says Shalom Bandor. "It leads to a sense of euphoria that makes workers take risks. Even if the employee got only NIS 2 million on realizing their shares, they feel more confident about taking a risk and make large real estate purchases."

Silicon Valley syndrome

What's happening now in Tel Aviv can be understood from the wave of IPOs in Silicon Valley a decade ago. One year after the Facebook IPO, apartment prices in areas where Facebook employees lived jumped 20.9%, at a time when apartment prices in San Francisco and the surrounding area rose 16.8%, according to real estate company Zillow. This contributed to a real increase of about $30,000 in apartment prices in the first post-IPO year. According to Zillow, a 20% down payment for an apartment in San Francisco is more than the full price of an average apartment in cities like Chicago, Dallas and Nashville.

The rise in Silicon Valley housing prices led to a protest movement on the part of investors, entrepreneurs and workers who have moved to other US cities with saner costs of living. Examples are entrepreneur Elon Musk, who announced that he was moving to Austin, Texas, as did software giant Oracle, while big data company Palantir Technologies moved to Denver, Colorado,

Published by Globes, Israel business news - en.globes.co.il - on June 30, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021.

Tel Aviv Photo: Shutterstock
Tel Aviv Photo: Shutterstock
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