Some Israeli businesses have done surprisingly well, according to Dan Senor and
Saul Singer in their book Start-Up Nation, The Story of Israel’s Economic
Miracle. The cover says, “While Americans emphasize decorum and exhaustive
preparation, Israelis put chutzpah first.”
But what else do you check
apart from chutzpah before investing in an Israeli company? Before investing in
any company, you should carry out due diligence and consult legal and
professional advisers in each country. Here is a non-exhaustive review of things
• First, what is their product? Does it work or does it still
need “just a few more months” of development? The easiest way to answer that is
to check there are successful sales or at least sales orders.
what is the “value proposition” that makes it special in the marketplace? Is
there intellectual property (IP)? Is it legally protected by patents or similar?
Or is it a “me too” product hoping to do well until the next “me too” product
comes along? • Third, do their goals match yours? If the company doesn’t have
goals, it certainly won’t achieve them. In hi-tech, homeland security and
medical devices, you may hope for an exit in three to five years. An exit may be
by way of acquisition or initial public offering (IPO) on a stock exchange. In
biotech it may take 10- 15 years. In other sectors you may be more interested in
a steady annual return over many years.
• Fourth, what is the deal on
offer? What will your money be used for? How much do they need and what
percentage of the action would you get? This is often a controversial area, as
most Israeli entrepreneurs have trouble going below 50.1 percent even if they
will still be a major force at, say, 40%. Later rounds of finance are even
tougher. The later investors must generally pay more and should check what their
percentage will be, especially if an earlier investor benefits an antidilution.
And do you get a seat on the board and veto rights? • Fifth, who are the major
players? The entrepreneur(s) pushing the operation, the inventor if any, the
other investors, the CEO, CFO, CTO, the other key employees, the lawyers, the
accountants, the bankers and any mentor behind the scene.
• Sixth, how do
you rate the management? Do they have vision or just tunnel vision? Is each
executive well educated, experienced, fit and able to devote their time and
energies to the venture? Is there a chief financial officer? If not, walk away;
you can’t hand over money if there is nobody to look after it. Are there regular
orderly board meetings? And are there detailed monthly and quarterly management
accounts? There should be, as the Israeli tax regulations require proper
accounting records to be kept.
• Seventh, are their finances in
reasonable shape? How well did the company do last year and this year? Have
future projections been prepared based on reasonable assumptions? Do they show
reasonable growth? If the company is still at the development stage, what is the
cash burn rate? When is your payback expected? Is there sufficient cash flow?
Have you checked for liens and mortgages at the Companies Registry and
elsewhere? Are costs reasonable? • Eighth, what is the marketing strategy for
generating revenues? Has sufficient money been earmarked for personnel and
promotion? And what is the business model? Will customers be charged for
products, time, usage, monthly subscription? And what are the risks for the
company and for you? • Ninth, what is the tax strategy? Don’t wait until
start-up losses are used up. Israel offers attractive tax breaks for preferred
enterprises that are productive and generate at least 25% of their revenues
competitively on international markets. And foreign investors should be exempt
from Israeli capital-gains tax on a sale of their shares.
• Tenth, will
there be growth by acquisition of other companies? What are the criteria? Will
all aspects be reviewed, such as synergies, removing duplication, safe financing
and improving the operational and tax posture? Will you be consulted? All in
all, will the management go all out and try and make the company succeed? This
will take more than chutzpah. Expect the unexpected and be prepared to win or
As always, consult experienced tax advisers in each country at an
early stage in specific cases.
email@example.com Leon Harris is a certified
public accountant and tax specialist at Harris Consulting & Tax Ltd.
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