An exit: how much tax do you really pay on selling a startup?

Busting the myth: how much the state really takes

Let us start with the main point: when a founder sells their shares, that is a capital gain, not a salary. An "ordinary" individual pays 25% on a capital gain; a material shareholder, someone holding 10% or more, which is almost every founder, pays 30%; and on high income a 3% surtax is added on the portion above 721,560 ILS (as at 2026). In other words, a typical founder at an exit pays around 33%. A lot of money, but very far from "half". Here is how it looks on an exit of 10 million ILS, on simplifying assumptions:

Why "on simplifying assumptions"? The calculation assumes a negligible acquisition cost, no other income in the same year, no losses to offset and no special consideration components, and it ignores adjustments such as computing the real gain. In reality every one of those factors moves the number, almost always in your favour. That is exactly why a real calculation is done on your data, not on an example from a guide, not even from ours.

And where did the half myth come from? From mixing up two other worlds: the marginal rate on salary, which really does climb to 47% (and 50% with the surtax), and the two-tier route of company profits drawn as a dividend, corporate tax of 23% and then a dividend at 30% plus surtax, which comes to roughly 46% to 48%. We expanded on that difference in the salary or dividend guide. Selling your shares is neither of those, and that confusion is what produces bad tax planning and unnecessary panic.

Selling shares or assets? The difference is worth millions

Before arguing about the price, you argue about what is being sold, and that question has an enormous tax consequence:

• A share deal: the buyer purchases the company itself from the shareholders. One tax event, at your level: a capital gain of 25% or 30% plus the surtax, as in the previous chapter. This is the deal sellers like. Simple in tax terms, and the company passes across as it is.
• An asset deal: the company sells the activity, the IP and the assets. The buyer gains, choosing exactly what to buy without the liabilities and the history, and receiving a new cost basis (a step-up). But for you the route becomes two-tier: the company pays 23% corporate tax on the gain from selling the assets, and for the money to reach your pocket it is distributed as a dividend, 30% plus surtax. Combined: around 46% to 48%. Suddenly the half myth almost comes true, purely because of deal structure.

So this is one of the genuinely important negotiation items: buyers will push for assets, sellers for shares, and the gap gets priced. In the small exits of builders, selling a micro SaaS, a website or a client book, an asset deal is actually common, and sometimes what is sold is an individual's activity altogether. We devoted the selling your product guide to that.

Two further layers worth mentioning here already: if you did a flip to Delaware, the parent company's place of residence changes the tax picture for everyone, and that is checked before you sign anything. And if you raised on a SAFE, your investors will convert or be repaid within the deal according to the instrument's terms, one more reason to make sure the tax aspects of the SAFE are closed in advance rather than opened on closing day.

The employees at an exit: Section 102 options at the moment of truth

An exit is the moment you promised employees options for, and it is also the moment it becomes clear whether your Section 102 plan was managed properly. When it was, the picture is a good one: employees on the capital track with a trustee pay 25% on the gain, the trustee, who remains a party to the deal, withholds the tax at source from their consideration, and everyone leaves the story smiling and without letters from the assessing officer.

What has to be verified on the eve of a deal?

• Lockup status: the condition for the benefit is holding with the trustee for 24 months from the grant. For long-standing employees that is behind them; for fresh grants it is not. A sale that breaches the track's conditions draws marginal-rate tax as employment income, so in deals closing before that period has run for some employees it is customary to arrange the treatment in advance with the Tax Authority and in the deal documents.
• Accelerated vesting: if you set acceleration mechanisms (full or partial, on a deal or on a dismissal following one), they are triggered now, they change the division of the consideration, and they are of great interest to the buyer.
• Options that have not vested: these are usually replaced with equivalent compensation at the buyer or cashed out under a mechanism set in the deal. Important to know: cashing out a component contingent on continued employment may be taxed as salary rather than as a capital gain, one more clause that needs professional eyes on the drafting.

All the mechanics of setting up the plan, the trustee and the cap table are set out in the Section 102 options guide. If you are reading these lines with the deal already on the table and something there is not in order, this is exactly the moment to deal with it, before the buyer's due diligence rather than during it.

Earn-out, escrow and holdback: the structures that complicate the tax

In real deals the consideration almost never arrives as one sack of money on closing day. The common components, each of them an open tax question that has to be closed in the drafting:

• Earn-out, consideration contingent on targets. "Another 3 million if revenue doubles within two years." The questions: when the tax event on the contingent component arises, and what its character is, a capital gain or other income. The answers depend on the structure set, and in material deals they are arranged in advance, sometimes by approaching the Tax Authority.
• Escrow. Part of the consideration sits in trust for a year or two to secure the representations you gave. It is your money, but you may return part of it, and you will only meet it in the future. The timing and manner of taxing that component matter, and should be agreed in advance.
• A holdback for founders who stay. The buyer wants you for another three years, and part of the consideration is contingent on your staying. This is the most dangerous clause of all in tax terms: a component contingent on continued employment may be classified as salary, at the marginal rate plus National Insurance, instead of a capital gain. The same shekel, at almost double the tax.
• Reverse vesting on the consideration. A variation on the same idea, shares or consideration released gradually as long as you remain with the company. The tax authorities' position on such mechanisms depends on the terms and the drafting, and the difference between good drafting and careless drafting is exactly the difference between a capital character and an ordinary income character. The foundations are settled in the founders agreement, years before a buyer enters the picture.

Before signing: withholding, approvals and planning

Here is the part that turns an accountant from "the one who prepares the reports" into "the one who saved us a million": most of the optimization of an exit is done before the structure locks. The practical steps:

• Withholding at source and approvals. A buyer withholds tax at source from the consideration, unless you presented an exemption or a reduced-rate approval from the Tax Authority. Without orderly approvals for every seller, a substantial part of the money will be stuck with the buyer or with the Tax Authority until the accounts are settled. This is arranged in advance, not after closing.
• Reporting and an advance within 30 days. A sale of private shares is reported to the Tax Authority and an advance paid within 30 days of the sale. You do not wait for the annual return. Anyone not prepared for this discovers interest and linkage on the surprise.
• Offsetting capital losses. Losses from private investments, from securities or from earlier ventures that accrued lawfully are offset against the exit gain and reduce the tax, but only if they are documented and reported. An exit year is an excellent year to put the portfolio in order.
• Spreading the gain. In certain conditions a capital gain can be spread over several tax years, a tool relevant mainly to reducing surtax exposure. Not for everyone and not always worthwhile; you check it in numbers.
• A pre-ruling in complex structures. Exchanging shares for the buyer's shares, a material earn-out, handling employees' Section 102 mid-lockup: all of these have advance tax ruling routes that remove uncertainty before you commit.

The common denominator: everything is determined in the deal documents, and the deal documents are determined between the term sheet and the SPA. A conversation with the accountant after signing is a post-mortem; before, it is planning. If there is serious interest in your company, even if it is still "unofficial", talk to us now, in full discretion of course.

After the exit: the surtax, the capital declaration and the money that keeps working

The money is in, the champagne is open, and a few matters remain that must not be left open:

• The full annual picture. The surtax is computed on all your income in that year: salary, dividends, rent and the exit gain together. An exit year is a year in which every additional shekel of income is taxed at the top, so the timing of bonuses, dividends and other realizations around it is a decision rather than an accident.
• A capital declaration. After such a sharp change in the bank account, you can expect a demand from the Tax Authority for a capital declaration. When the exit is reported and documented properly this is a formality; when it is not, it is a headache. Keep every document of the deal, permanently.
• The next money. Some founders become investors, and the state has an interest in that: the Angels Law grants tax benefits for qualifying investments in young technology companies. Others set up the next startup, and then all the questions of structure, personal holding against a holding company and multi-year planning return, this time with many more zeros.

And above all: a good exit is not one where "little tax came out", but one where not a single shekel was paid because of disorder, careless drafting or planning done too late. That is built years ahead, from the founders agreement, through the option plan, to the structure you raised in.