What CVC's Should Consider When Investing In An Israeli Start-Up

The State of Israel is an economic success story. It has more companies listed on US stock exchanges, barring the United States and China, than any other country in the world, the highest per capita count of engineers, and the highest density of high-tech startups. This flourishing environment provides a unique opportunity for corporations with venture capital arms ("CVC's") to invest and engage. Since the State of Israel itself is a tiny market with a population of 9 million, almost all Israeli technology companies are built with a view to becoming global companies and are therefore very open to partnering with large foreign players.

With this backdrop, there remain a number of regulatory and Israel specific factors to keep in mind when investing in an Israeli startup.

Know your Grants

Israel's Encouragement of Research, Development and Technological Innovation in the Industry Law, 1984, ("Law") was a unique statute intended to create new employment opportunities in the technology industry. The Law created the Office of the Chief Scientist (now, the National Technological Innovation Authority ("IIA")), and empowered it to provide grants for specific technology projects and to encourage domestic research and development. Most Israeli technologies are very receptive to these grants because the IIA does not receive any equity from the recipient company in exchange for the grants.

However, with these grants have come certain obligations and restrictions. An Israeli corporate recipient of an IIA grant will need to pay royalties to the IIA from future revenues if and when received, arising on account of the funded technology, up to the amount of the grant. Furthermore, they are obligated to receive IIA approval for any merger, asset acquisition, or similar change of control transaction with a non-Israeli partner. Additionally, the IIA has full discretion on whether to approve the transfer abroad of IP which was funded by the IIA and approval of such transfer can result in very large payments owed to the IIA up to as much as six times the original grant amount. There are also restrictions on the transfer overseas of manufacturing rights developed with IIA assistance, which will be subject to certain increased royalty payment obligations.

Know your IP Ownership

With the wealth of experience and knowledge available to professionals associated with universities, hospitals and the army, some Israeli startups choose to engage such professionals in...