Israeli Startup Toolkit

IMPORTANT DISCLAIMER: This skill provides general guidance only. Israeli corporate law, tax law, and securities regulation are complex. Always consult with a licensed Israeli lawyer and accountant before making binding decisions.

Step 1: Identify Startup Stage

Step 2: Company Formation

Register an Israeli Ltd:

Step-by-step registration:

1. Choose company name
   - Check availability: ica.justice.gov.il
   - Must be unique, Hebrew or English
   - Suffix: Ltd

2. Prepare Articles of Association (takanon)
   - Standard template available from Companies Registrar
   - Customize: share classes, board composition, transfer restrictions
   - Recommended: Use lawyer-drafted articles for startups

3. Appoint initial directors
   - Minimum: 1 director
   - Israeli residency not required (but practical for banking)
   - Director ID (teudat zehut) or passport for foreign directors

4. Register online
   - Portal: ica.justice.gov.il
   - Fee: ~2,600 NIS
   - Timeline: 3-7 business days
   - Documents: Articles, director appointments, registered address

5. Post-registration
   - Open corporate bank account (Bank Leumi, Hapoalim, Discount)
   - Register for tax at local tax office (pakid shuma)
   - Register for VAT if expected revenue exceeds threshold
   - Register for National Insurance (Bituach Leumi) as employer

Founder share allocation example:

def calculate_founder_allocation(founders, vesting_months=48, cliff_months=12):
    """Calculate founder share allocation with vesting."""
    total_shares = 10_000_000  # Common Israeli startup starting point
    allocation = []

    for founder in founders:
        shares = int(total_shares * founder["percentage"] / 100)
        allocation.append({
            "name": founder["name"],
            "shares": shares,
            "percentage": founder["percentage"],
            "vesting_months": vesting_months,
            "cliff_months": cliff_months,
            "shares_at_cliff": shares * cliff_months // vesting_months,
            "monthly_vesting_after_cliff": shares // vesting_months,
            "share_class": "Ordinary",
        })

    return {
        "total_authorized": total_shares,
        "allocations": allocation,
        "unallocated": total_shares - sum(a["shares"] for a in allocation),
        "note": "Reserve 10-15% for employee option pool (ESOP)"
    }

Step 3: Innovation Authority Grants

IIA program selection:

Grant application checklist:

IIA R&D Fund Application:

- Company registered in Israel
- R&D conducted primarily in Israel
- IP owned by the company (not founders personally)
- Technological innovation (not just business model)
- Detailed R&D plan (12-24 months)
- Budget breakdown (salaries, subcontractors, materials, equipment)
- Team qualifications (CVs of key R&D personnel)
- Market analysis and business potential
- No parallel funding for same R&D from other government sources
- Commitment to report progress and financials

Application portal: innovationisrael.org.il
Review period: 2-4 months typically
Approval rate: ~40-50% for R&D Fund

Key IIA restrictions:

• IP developed with IIA funding cannot be transferred abroad without approval
• Transfer fee: up to 6x the grant amount received
• Royalty payments: 3-5% of revenue until grant repaid (with interest)
• Manufacturing preference: IIA prefers production in Israel
• Annual reporting requirements on funded R&D

Step 4: Investment Agreements

Israeli SAFE template structure:

Israeli SAFE -- Key Terms:

1. Investment Amount: [Amount] NIS or USD
2. Valuation Cap: [Cap] (pre-money)
3. Discount Rate: [15-25%] typical
4. Governing Law: Laws of the State of Israel
5. Dispute Resolution: Tel Aviv courts / arbitration
6. Conversion Trigger: Equity Financing of at least [Amount]
7. MFN Clause: [Yes/No] -- Most Favored Nation
8. Pro-rata Rights: [Yes/No] -- right to participate in next round
9. Israeli Tax: Subject to Israeli tax withholding on conversion

Important Israeli-specific clauses:
- IIA notification (if company received grants)
- Section 102 interaction (for employee investors)
- Israeli securities law exemptions (private placement)
- Anti-money laundering compliance

Convertible note vs SAFE comparison:

                    SAFE            Convertible Note
Interest rate:      None            5-8% annually
Maturity date:      None            12-24 months
Repayment:          No              Yes (at maturity if no conversion)
Israeli tax:        On conversion   Interest taxed annually
Complexity:         Simple          More complex
Investor protection: Lower          Higher (debt status)
Common in Israel:   Pre-seed/seed   Seed/bridge rounds

Step 5: Option 102 Setup

Set up employee stock option plan:

Option 102 Capital Gains Track -- Setup Steps:

1. Draft ESOP (Employee Stock Option Plan)
   - Hire Israeli employment/tax lawyer
   - Define: pool size, vesting schedule, exercise price, trustee

2. Select ITA-approved trustee
   - Major trustees: Bank Leumi Trust, Bank Hapoalim Trust,
     IBI Trust, Altshuler Shaham
   - Fee: Setup fee + annual per-participant fee

3. File plan with Israel Tax Authority (ITA)
   - Submit plan document to local pakid shuma
   - 30-day objection period (ITA can object or modify)
   - Plan effective after 30 days if no objection

4. Grant options to employees
   - Board resolution for each grant
   - Option agreement signed by employee
   - Trustee notified and manages deposit

5. Vesting and holding period
   - Standard: 4-year vesting, 1-year cliff
   - 24-month holding period from grant date (for capital gains treatment)
   - Shares held by trustee during holding period

6. Exercise and sale
   - Employee exercises options (pays exercise price)
   - After holding period: capital gains tax (25%)
   - Trustee handles withholding and reporting

Option 102 tax comparison:

def compare_option_102_tracks(grant_value, exercise_price, sale_price):
    """Compare tax outcomes for Option 102 tracks."""
    gain = sale_price - exercise_price

    capital_gains_track = {
        "track": "Capital Gains (Trustee)",
        "holding_period": "24 months",
        "tax_rate": 0.25,
        "tax_amount": gain * 0.25,
        "net_to_employee": gain * 0.75,
        "employer_deduction": False,
    }

    income_track = {
        "track": "Income (Trustee)",
        "holding_period": "12 months",
        "tax_rate": 0.50,
        "tax_amount": gain * 0.50,
        "net_to_employee": gain * 0.50,
        "employer_deduction": True,
    }

    non_trustee = {
        "track": "Non-Trustee (102)",
        "holding_period": "None",
        "tax_rate": 0.50,
        "tax_amount": gain * 0.50,
        "net_to_employee": gain * 0.50,
        "employer_deduction": True,
    }

    return [capital_gains_track, income_track, non_trustee]

Step 6: R&D Tax Benefits

Tax benefit eligibility check:

Preferred Enterprise:
- Conditions: 25%+ revenue from exports
- Tax rate: 7.5% (Area A) or 16% (elsewhere)
- Applies to: Industrial or tech companies

Preferred Technological Enterprise:
- Conditions: Significant R&D activity, IP ownership
- Tax rate: 6% on qualifying IP income (Area A), 12% (elsewhere)
- Additional: Reduced withholding on dividends (4-20%)

R&D Expense Deduction (Section 20a):
- Full deduction of R&D expenses in the year incurred
- Applies to: All R&D conducted in Israel
- No need for IIA approval (separate from grants)

Angel Law (Section 20c):
- Individual investors can deduct up to 5M NIS investment
- Company must be qualifying R&D company
- Investment in first 4 years of company life
- Deduction spread over 3 years

Example 1: New Startup Registration

User says: "I want to register a new tech startup in Israel with my co-founder" Actions:

1. Guide through company name check at ica.justice.gov.il
2. Recommend standard articles with startup-friendly provisions
3. Calculate founder allocation (e.g., 50/50 with 4-year vesting)
4. List post-registration steps (bank, tax, VAT, Bituach Leumi) Result: Step-by-step registration guide with allocation table.

Example 2: IIA Grant Application

User says: "We want to apply for Innovation Authority funding for our AI product" Actions:

1. Assess stage and recommend program (Tnufa for early, R&D Fund for later)
2. Walk through application requirements
3. Highlight IP restrictions and royalty obligations
4. Provide budget template guidance Result: Program recommendation with application checklist.

Example 3: ESOP Setup

User says: "I need to set up stock options for my first 5 employees" Actions:

1. Recommend Option 102 Capital Gains Track
2. Suggest pool size (10-15% of company)
3. Recommend trustee options
4. Outline filing process with ITA
5. Provide standard vesting terms Result: Complete Option 102 setup plan with trustee comparison.

References

• references/iia-programs-guide.md — Detailed guide to Israel Innovation Authority grant programs including R&D Fund, Tnufa (early stage), incubator programs, BIRD (US-Israel binational), and Horizon Europe tracks. Covers funding percentages, maximum amounts, repayment terms, eligibility requirements, application process, and approval rates. Consult when helping users select the right IIA program or prepare grant applications.
• references/investment-term-sheets.md — Israeli investment agreement templates including SAFE and convertible note structures with Israeli-specific clauses (IIA notification, Section 102 interaction, Israeli securities law exemptions, anti-money laundering). Consult when drafting or reviewing early-stage investment terms under Israeli law.
• references/option-102-reference.md — Complete reference for Section 102 of the Israeli Income Tax Ordinance covering all three tracks (Capital Gains Trustee, Income Trustee, Non-Trustee), holding periods, tax rates, employer deduction rules, ITA-approved trustees, filing procedures, and common pitfalls. Consult when setting up an ESOP or advising on employee equity compensation tax implications.

Issue: "IIA rejected our application"

Cause: Insufficient technological innovation, weak R&D plan, or budget issues Solution: Request feedback from IIA reviewer, strengthen innovation component, consider reapplying in next cycle. IIA allows resubmission.

Issue: "Option 102 holding period not met"

Cause: Employee left or shares sold before 24-month holding period Solution: Tax difference applies -- gains taxed as income (up to 50%) instead of capital gains (25%). Trustee will withhold at higher rate. Plan for this in employment agreements.

Issue: "Cannot transfer IP abroad"

Cause: IIA-funded IP has transfer restrictions Solution: Apply to IIA for transfer approval. Be prepared to pay transfer fee (up to 6x grant amount). Consider structuring with Israeli subsidiary retaining IP.