Recent   Developments in Israeli Hi-Tech  IEFF EVENT- June 1, 2011   Dr. Ayal Shenhav
Topics <ul><li>General Overview of the current state of Israeli Hi-Tech and VC Market. </li></ul><ul><li>The new  Angel In...
Topics (Cont.) <ul><li>  </li></ul><ul><li>The Israeli Chief Scientist – New Developments  - Pros and Cons. </li></ul><ul>...
State of the Market Mid 2010 Required Immediate Action <ul><li>VC Investments were declining rapidly. </li></ul><ul><li>No...
Looking Back at the Past 10 Years  <ul><li>Average annual VC Investment in Israel 2001 – 2008 was   $1184MM. </li></ul><ul...
Amounts Raised by Israeli VCs. 2000 - 2010
Analysis and Trends of Israeli VC Market <ul><li>Almost no fund raising. Only $200M new funds raised in 2009 (Sequoia Capi...
Analysis and Trends of Current VC Market (cont.) <ul><li>New “Micro Funds” ($10 – 15MM funds) being formed to invest $500K...
Analysis and Trends of Current VC Market (cont.) <ul><li>Super angels joining the market in organized manner (e.g. Mori Ar...
Analysis of Current VC Market (cont.) <ul><li>M&A market is strong but exits typically in $10 -100MM range.  </li></ul><ul...
Recent Controversy re Future of Israeli VC Industry  <ul><li>“ Israel’s venture capital and startup industry is heading fo...
Government Action to Bring New Investors to the VC Market <ul><li>Adopting the Angel Investment Law. </li></ul><ul><li>Pro...
Angel Investment Law <ul><li>Came into effect 1.1.2011 </li></ul><ul><li>Investments by an individual in a “Target Company...
Angel Investment Law (cont.) <ul><li>Deduction for each individual is limited to 5 Million NIS per company (including inve...
Angel Investment Law (cont.) <ul><li>Target Company has to meet all of the following: </li></ul><ul><ul><li>Incorporated i...
Angel Investment Law – Open Issues <ul><li>Is deduction allowed for investments made through partnerships? </li></ul><ul><...
Assessment of Angel Law  <ul><li>Too early to tell. </li></ul><ul><li>Not fully known to the investors community and/or fo...
Safety Net to Israeli Pension Funds <ul><li>Program initiated by Ministry of Finance and Ministry of Trade.  </li></ul><ul...
Encouragement of  Capital Investment Law <ul><li>Major reform in 2011.  </li></ul><ul><li>Repeal of tax exemptions and imp...
Israeli OCS Funding <ul><li>The Israeli OCS funds participates in the cost of “approved programs”. </li></ul><ul><li>OCS f...
OCS Funding – Restrictions on Sale of IP <ul><li>Until 2005 IP developed with OCS funding could not be taken out of Israel...
OCS Funding – Restrictions on Sale of IP (cont.) <ul><li>Commencing in 2005 taking IP out of Israel is allowed but trigger...
OCS Funding – Restrictions on Sale of IP (cont.) <ul><li>For example: Company raised $18MM from VCs and $2MM from OCS. Ove...
OCS Funding <ul><li>Could save the company during tough times and/or allow achievement of R&D progress. </li></ul><ul><li>...
Returning Resident Regime <ul><li>The goal – encourage OLIM and Israeli Expatriates to move to Israel. </li></ul><ul><li>O...
Returning Resident Regime (cont.) <ul><li>“ Ordinary Returning Resident” – An Individual who returns to Israel after six y...
Returning Resident Regime (cont.) <ul><li>When did the individual cease to be an Israeli resident? </li></ul><ul><ul><li>T...
Returning Resident Regime (cont.) <ul><li>When did the individual return to be an Israeli resident? </li></ul><ul><ul><li>...
Returning Resident Regime – Taxation of Passive Income <ul><li>For Special Returning Resident / Oleh: 10 year exemption on...
Returning Resident Regime – Taxation of Capital Gains <ul><li>10 year exemption for assets held outside of Israel.  </li><...
Returning Residents – Compensation Income <ul><li>For Special Returning Residents 10 year exemption for income from servic...
Returning Residents – Operation Through Companies <ul><li>In general a company managed and controlled from Israel is viewe...
Returning Residents – Getting Ready to Come Back <ul><li>Make sure you hold shares in a non Israeli company (the exemption...
Returning Researchers Law <ul><li>Mr. X has been living in California for 15 years. He is a Professor at Stanford. </li></...
Returning Researchers Law (cont.) <ul><li>A new exemption came into effect on 1.1.2011 and applies to academic researchers...
Returning Researchers Law (cont.) <ul><li>The exemption applies to income attributable to non Israeli payments received by...
Where to Form Your Company Israel or Delaware? <ul><li>Key Considerations: </li></ul><ul><li>Raising Money from VCs – Adva...
Issues for Delaware Parent with Israeli Sub <ul><li>Location of IP (Israel or US?) </li></ul><ul><li>Inter – Company Agree...
<ul><li>Dr. Ayal Shenhav </li></ul><ul><li>Shenhav & Co., Law Offices </li></ul><ul><li>+972-3-611-0760  </li></ul><ul><li...
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Ayal Shenhav- IEFF presentation

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Dr. Shenhav's presetation from IEFF from June 2nd 2011.

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Ayal Shenhav- IEFF presentation

  1. 1. Recent Developments in Israeli Hi-Tech IEFF EVENT- June 1, 2011 Dr. Ayal Shenhav
  2. 2. Topics <ul><li>General Overview of the current state of Israeli Hi-Tech and VC Market. </li></ul><ul><li>The new  Angel Investment Law.  </li></ul><ul><li>The Government Safety Net for Institutional investment in Venture Capital funds </li></ul><ul><li>The Reform in the Encouragement of Investment Law. </li></ul>
  3. 3. Topics (Cont.) <ul><li>  </li></ul><ul><li>The Israeli Chief Scientist – New Developments - Pros and Cons. </li></ul><ul><li>The Returning Resident and Returning Researcher tax benefits.  </li></ul><ul><li>Key Issues in Operating as an Israeli – US company </li></ul>
  4. 4. State of the Market Mid 2010 Required Immediate Action <ul><li>VC Investments were declining rapidly. </li></ul><ul><li>No new funds raised by Israeli VCs . </li></ul><ul><li>Israeli Institutional Investors refrain from investments in venture capital. </li></ul><ul><li>Exits continue but very limited amount of IPOs. </li></ul><ul><li>The result – the Ministry of Finance came up with a package of measures to assist the hi-tech industry. </li></ul><ul><li>This package became effective on 1.1.2011 </li></ul>
  5. 5. Looking Back at the Past 10 Years <ul><li>Average annual VC Investment in Israel 2001 – 2008 was $1184MM. </li></ul><ul><li>2008 figure was $1398MM </li></ul><ul><li>2009 Investment level – $735MM </li></ul><ul><li>2010 Investment level – $880MM </li></ul><ul><li>In short – a deep decline in 2009 – 2010. </li></ul><ul><li>(Source PWC Money Tree) </li></ul>
  6. 6. Amounts Raised by Israeli VCs. 2000 - 2010
  7. 7. Analysis and Trends of Israeli VC Market <ul><li>Almost no fund raising. Only $200M new funds raised in 2009 (Sequoia Capital). No new funds raised in 2010. </li></ul><ul><li>The leading Israeli VCs have not raised a new fund since 2008. </li></ul><ul><li>Many leading funds not investing, reducing staff size and even dissolving (Evergreen). </li></ul><ul><li>US VCs playing a key (even dominant) role in the market (Battery, Benchmark, Bessemer, Caanan, Greylock, LightSpeed, NVP, Sequoia and others). </li></ul>
  8. 8. Analysis and Trends of Current VC Market (cont.) <ul><li>New “Micro Funds” ($10 – 15MM funds) being formed to invest $500K – $1MM in seed rounds and target M&A of portfolio company in range of $10-20MM. Such M&A could yield 3-4X returns. </li></ul><ul><li>Private Equity Funds supporting late stage companies [for example Cadent (Fortissimo), Primesense (Silverlake)]. </li></ul><ul><li>Q1 2011 quite strong ($342MM invested compared to $170MM in Q1 2010). </li></ul><ul><li>Tough times for seed / first round companies. </li></ul>
  9. 9. Analysis and Trends of Current VC Market (cont.) <ul><li>Super angels joining the market in organized manner (e.g. Mori Arkin Accelmed) or increased ad-hoc investing activity. </li></ul><ul><li>Increased awareness of Venture Lending benefits but Venture Lending funds are cautious and seeking later stage companies. </li></ul><ul><li>Recent exits (such as Provigent $350MM, Wintegra $250MM) have improved returns of VCs but overall returns are still low and most funds have not returned the capital commitments. </li></ul><ul><li>Israeli VCs look to invest outside of Israel (for example JVP QLIK exit, Sequoia Jajah exit). </li></ul>
  10. 10. Analysis of Current VC Market (cont.) <ul><li>M&A market is strong but exits typically in $10 -100MM range. </li></ul><ul><li>IPOs rare and relatively small (Only 2 Hi-Tech IPOs in US markets in 2010 - MediaMind ($62MM) and Veringo $11MM). </li></ul><ul><li>Very few (if any) $1Billion companies formed in Israel in last decade…New trend to try and go for the Billion Dollar Company. </li></ul><ul><li>Critical time for the Israeli VC Industry – 2011 fund raising will determine future of industry. </li></ul>
  11. 11. Recent Controversy re Future of Israeli VC Industry <ul><li>“ Israel’s venture capital and startup industry is heading for collapse…the industry, which is the economy’s growth engine, is liable to be irreversibly damaged.” (Zeev Holtzman, May27, 2011 http://www.pehub.com/107025/vcj-report-retooling-the-mideast-venture-scene/ ). </li></ul><ul><li>Michael Eizenberg, “An Open Letter To Zeev Holtzman - The Sky is not falling in Israel. It is Getting Brighter” (May 31, 2011) http://sixkidsandafulltimejob.blogspot.com/2011/05/open-letter-to-zeev-holtzman-sky-is-not.html </li></ul>
  12. 12. Government Action to Bring New Investors to the VC Market <ul><li>Adopting the Angel Investment Law. </li></ul><ul><li>Providing a “Safety Net” Israeli Pension Funds. </li></ul>
  13. 13. Angel Investment Law <ul><li>Came into effect 1.1.2011 </li></ul><ul><li>Investments by an individual in a “Target Company” are allowed as a deduction against income from any source. </li></ul><ul><li>The result - an investment in a “Target Company” allows a reduction in taxes (from compensation, services, etc.) and a saving of up to $45 for each $100 invested. </li></ul><ul><li>The reduction is over a three year period (i.e., up to $15 per annum). </li></ul>
  14. 14. Angel Investment Law (cont.) <ul><li>Deduction for each individual is limited to 5 Million NIS per company (including investments by related parties). </li></ul><ul><li>Deduction is only for investments in equity and issuance of new shares. </li></ul><ul><li>Investment has to take place between 1.1.2011 and 31.12.2015. </li></ul><ul><li>The individual has to hold the shares during all the “benefit period” – i.e., three years. </li></ul><ul><li>Upon sale of the shares the basis does not include amounts allowed as a deduction. </li></ul>
  15. 15. Angel Investment Law (cont.) <ul><li>Target Company has to meet all of the following: </li></ul><ul><ul><li>Incorporated in Israel. </li></ul></ul><ul><ul><li>Managed from Israel. </li></ul></ul><ul><ul><li>Is not publicly traded during the benefit period. </li></ul></ul><ul><ul><li>75% of the investment is used for R&D. </li></ul></ul><ul><ul><li>75% of R&D expenses are used in Israel. </li></ul></ul><ul><ul><li>Income of the Company in year of investment and in subsequent year does not exceed 50% of R&D. </li></ul></ul><ul><ul><li>R&D expenses are used to advance a “factory” owned by the company (not outsourcing). </li></ul></ul><ul><ul><li>R&D expenses constitute 70% of the Company’s income. </li></ul></ul>
  16. 16. Angel Investment Law – Open Issues <ul><li>Is deduction allowed for investments made through partnerships? </li></ul><ul><li>What happens if there is a forced sale during the three year period? </li></ul><ul><li>How to prove company complied with the requirements for deduction? </li></ul>
  17. 17. Assessment of Angel Law <ul><li>Too early to tell. </li></ul><ul><li>Not fully known to the investors community and/or founders. </li></ul><ul><li>Usually the tax benefit is not sufficient to induce investment (but may result in increased investment). </li></ul><ul><li>Induces Founders to form their companies as Israeli companies. </li></ul>
  18. 18. Safety Net to Israeli Pension Funds <ul><li>Program initiated by Ministry of Finance and Ministry of Trade. </li></ul><ul><li>Guarantee of a minimum return of 15% over the life of the fund (7 years). </li></ul><ul><li>Participation will not exceed 25% of investment (for example if fund returns 70% the participation brings investor to 95%). </li></ul><ul><li>Overall commitment (to all funds) 200MM NIS. </li></ul><ul><li>Participating funds have to meet certain investment requirements (e.g., 85% of portfolio in Israel). </li></ul><ul><li>Not attractive enough to institutional investors. </li></ul>
  19. 19. Encouragement of Capital Investment Law <ul><li>Major reform in 2011. </li></ul><ul><li>Repeal of tax exemptions and implementing in lieu of an exemption a low tax regime. </li></ul><ul><li>2011 – 2012 10% in Approved Zone and 15% in Rest of Country. </li></ul><ul><li>2013 – 2014 - 7% in Approved Zone and 12.5% in rest of country. </li></ul><ul><li>2015 and onward – 6% in Approved Zone and 12% in rest of country. </li></ul><ul><li>Dividend withholding tax of 15%. </li></ul><ul><li>Overall Israeli corporate tax rates are significantly lower than US tax rates. </li></ul>
  20. 20. Israeli OCS Funding <ul><li>The Israeli OCS funds participates in the cost of “approved programs”. </li></ul><ul><li>OCS funding replaces equity investment (or venture debt). </li></ul><ul><li>OCS funding in non dilutive. </li></ul><ul><li>OCS funding has very favorable repayment terms (3% of sales of products developed in the approved program). </li></ul>
  21. 21. OCS Funding – Restrictions on Sale of IP <ul><li>Until 2005 IP developed with OCS funding could not be taken out of Israel. </li></ul><ul><li>Acquisition of shares of an Israeli company is not “taking out” of IP (the corporate entity remains intact and IP belongs to such entity). </li></ul>
  22. 22. OCS Funding – Restrictions on Sale of IP (cont.) <ul><li>Commencing in 2005 taking IP out of Israel is allowed but triggers a payment to the OCS. </li></ul><ul><li>Payment is based on following formula (following 2010 amendment): </li></ul><ul><li>Payment = Sale Price X OCS Grants </li></ul><ul><li> R&D Expenses </li></ul>
  23. 23. OCS Funding – Restrictions on Sale of IP (cont.) <ul><li>For example: Company raised $18MM from VCs and $2MM from OCS. Overall R&D over life of company $10MM (other $10MM sales marketing, G&A etc). </li></ul><ul><li>Company is sold for $20MM – OCS gets $4MM (20% of sale proceeds). </li></ul><ul><li>OCS got a 2x multiple while VC got less than 1X . </li></ul>
  24. 24. OCS Funding <ul><li>Could save the company during tough times and/or allow achievement of R&D progress. </li></ul><ul><li>However - Complicates Exit Event. </li></ul><ul><li>Unresolved debate (According to PWC 43% of funded companies were supported by OCS). </li></ul><ul><li>Most major VCs add covenants restricting OCS funding. </li></ul>
  25. 25. Returning Resident Regime <ul><li>The goal – encourage OLIM and Israeli Expatriates to move to Israel. </li></ul><ul><li>Offers extensive tax exemptions. </li></ul><ul><li>No reporting requirements. </li></ul><ul><li>Enacted in 2008 (60 th anniversary). </li></ul>
  26. 26. Returning Resident Regime (cont.) <ul><li>“ Ordinary Returning Resident” – An Individual who returns to Israel after six years. </li></ul><ul><li>“ Special Returning Resident” – An Individual who returns to Israel after ten years (in 2007 – 2009 five years). </li></ul><ul><li>Special Returning Resident treated like a new immigrant (“Oleh”) </li></ul>
  27. 27. Returning Resident Regime (cont.) <ul><li>When did the individual cease to be an Israeli resident? </li></ul><ul><ul><li>The main test “center of interests”. </li></ul></ul><ul><ul><li>Tax presumptions (425 days in three years test, 183 yearly test). </li></ul></ul><ul><ul><li>New amendment provides a 4 year test (two years of 183 days outside of Israel + 2 years of center of interests outside of Israel) renders individual a “non resident” from day 1. </li></ul></ul><ul><ul><li>Tax treaties may allow to establish non residency within one year or less. </li></ul></ul>
  28. 28. Returning Resident Regime (cont.) <ul><li>When did the individual return to be an Israeli resident? </li></ul><ul><ul><li>ITA Circular – Date of Return is date in which home is used permanently by any family member </li></ul></ul><ul><ul><li>One year “adaptation” ( שנת הסתגלות ) rule allows individual to be treated as foreign resident during first year (but this year counts if thereafter becomes a returning resident). </li></ul></ul><ul><ul><li>No official Government approval of “Returning Resident Status” is provided – rely on tax opinions. </li></ul></ul>
  29. 29. Returning Resident Regime – Taxation of Passive Income <ul><li>For Special Returning Resident / Oleh: 10 year exemption on passive income from non Israeli assets held prior to coming to Israel. </li></ul><ul><li>For Regular Returning Resident five year exemption. </li></ul><ul><li>New rules allow exemption for assets which replaced original non Israeli assets (more narrow “replacement rule for Regular Returning Resident). </li></ul><ul><li>Passive Income includes dividends, interest, royalties, rent. </li></ul>
  30. 30. Returning Resident Regime – Taxation of Capital Gains <ul><li>10 year exemption for assets held outside of Israel. </li></ul><ul><li>Partial exemption for sales after 10 years (10/11, 10/12 etc.). </li></ul><ul><li>For Special Returning Residents replacement rules apply. </li></ul>
  31. 31. Returning Residents – Compensation Income <ul><li>For Special Returning Residents 10 year exemption for income from services rendered outside of Israel. </li></ul><ul><li>For services rendered partially in Israel and partially outside of Israel allocation of income is required. </li></ul>
  32. 32. Returning Residents – Operation Through Companies <ul><li>In general a company managed and controlled from Israel is viewed as an Israeli resident for tax purposes and subject to Israeli tax. </li></ul><ul><li>A company managed and controlled (from Israel) by an Oleh / Special Returning Resident is deemed not controlled from Israel and is not subject to Israeli tax (for 10 years). </li></ul>
  33. 33. Returning Residents – Getting Ready to Come Back <ul><li>Make sure you hold shares in a non Israeli company (the exemption applies only to non Israeli assets!). </li></ul><ul><li>Unvested Options – Consider Moving unvested options into Section 102 Capital Gains Track (Reducing Israeli Tax). </li></ul><ul><li>Vested Options – Consider exercising US options and holding shares which will qualify for capital gains exemption (and US capital gains tax). </li></ul><ul><li>Consider US tax liability following the move to Israel (due to Green Card or Citizenship) including State Tax issues, 911 foreign income exemption, social security and more. </li></ul><ul><li>Move assets to “stable” investment mode (bonds, hedge funds, mutual funds) to avoid a sale which “ends” the exemption.. </li></ul><ul><li>Plan the date of your return to maximize Israeli tax benefits. </li></ul>
  34. 34. Returning Researchers Law <ul><li>Mr. X has been living in California for 15 years. He is a Professor at Stanford. </li></ul><ul><li>In 2010 Mr. X moves to Israel and joins Weitzman Institute. Mr. X discovers a new drug and is paid over the next 5 years $1,000,000 as his share of royalties. </li></ul><ul><li>Since Mr. X’s income is from Israeli sources he is subject to Israeli tax (even though he is a Special Returning Resident). </li></ul>
  35. 35. Returning Researchers Law (cont.) <ul><li>A new exemption came into effect on 1.1.2011 and applies to academic researchers. </li></ul><ul><li>A qualified researcher will be exempt from Israeli tax on payments from an Israeli research implementation company ( &quot; חברת יישום &quot; ). </li></ul><ul><li>A “qualified researcher” is an individual who becomes and Israeli resident from 1.1.2011 until 2015 and which was a non resident during the six prior years. </li></ul>
  36. 36. Returning Researchers Law (cont.) <ul><li>The exemption applies to income attributable to non Israeli payments received by the Implementation Company. </li></ul><ul><li>The exemption is for five years from the first year in which payments were received by the Implementation Company. </li></ul>
  37. 37. Where to Form Your Company Israel or Delaware? <ul><li>Key Considerations: </li></ul><ul><li>Raising Money from VCs – Advantage Delaware. </li></ul><ul><li>Raising Money from Angels – Advantage Israel. </li></ul><ul><li>Tax Regime – Advantage Israel. </li></ul><ul><li>Sale of Company – Advantage Delaware (TBD). </li></ul><ul><li>Going Public – Advantage Israel (Foreign Private Issuer). </li></ul><ul><li>Look and Feel – Advantage Delaware. </li></ul><ul><li>Due to Angel Law growing trend to incorporate in Israel. </li></ul>
  38. 38. Issues for Delaware Parent with Israeli Sub <ul><li>Location of IP (Israel or US?) </li></ul><ul><li>Inter – Company Agreement. </li></ul><ul><li>Unified Option Plan. </li></ul><ul><li>Establishing Management & Control outside of Israel. </li></ul>
  39. 39. <ul><li>Dr. Ayal Shenhav </li></ul><ul><li>Shenhav & Co., Law Offices </li></ul><ul><li>+972-3-611-0760 </li></ul><ul><li>[email_address] </li></ul><ul><li>www.shenhavlaw.co.il </li></ul>

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