You better take a lawyer with you!
For over a decade, the 'Startup Nation' has been waking up every so often to hear of another successful exit by an Israeli startup, thereby further heightening investors' expectations and dreams. The stock exchange is no longer the only place where you can invest in startups. Investors interested in specializing in this field and increasing their chances of making big profits are turning to investment houses and various venture capital funds to hear about different investment opportunities.
We hear all the time about 'angels' – people focused on investing in different startups. Even if you are not an angel investor, you can still invest in Israeli startups. But you better take a lawyer with you! This is not just a recommendation, but a crucial and fundamental piece of advice to anyone who wants to invest wisely, without getting involved in any unnecessary failed investments in addition to the normal risks entailed in any investment.
Being rich in original ideas is not enough to make an exit
Great ideas form the basis of any good development, but any investor must understand that a startup has to be founded on more than just an idea. This is why you need legal advice, to provide you with the system of knowledge you require to make your investment. Before reaching the point of investment, you must understand the legal aspects of the startup's idea and vision – in what directions is it developing? Will its implementation lead to the violation of any law in the countries where the target audience lives? Something that is right for Israel may not hold true for the United States, for example, and if your startup's target audience hails from different countries – and startups usually do – only professional legal consultants can clarify its chances of developing from an idea into an exit.
Interested in investing in an Israeli startup? You better take a lawyer with you, one who understands international law, since in most cases such enterprises are not limited to the Israeli market. The opposite is often true – the desired exit is usually an international matter, to allow investors to reap the profits they are looking for. In addition, you do not want to find yourself investing in a startup that is not original, that has already violated intellectual property rights or performed violations of passing off or commercial or industrial espionage. Only a lawyer experienced in this field can protect you against exposure to such claims and against significant losses.
Who are the startup's founders and how financially strong are they?
It is not only the startup's concept that you have to examine legally. While it is true that startups raise capital to function and continue developing their ideas, you still need to examine their business structure, the relations and contracts between partners, registration as a business and registration of patents and intellectual property rights. All of this information you must receive from the partners, and you must ensure that no information is hidden from you. Are you interested in investing in an Israeli startup? You better take a lawyer with you, to prevent risking your money unnecessarily. You must always inspect the corporate documents and the enterprise, which is something that only an expert lawyer can do proficiently. Even if you believe that you are facing a unique business opportunity to make a guaranteed profit, it is strongly recommended that you look into the legal foundations of the startup and the business model through which the entrepreneurs plan to make their profit. You should also further inquire who the entrepreneurs are. Bad relationships can be the downfall of the enterprise, or can lead it into legal battles that may drive away future users and buyers, and you do not want to sink in this boat together with them. All of this can be covered with a due diligence audit of the startup's personnel and the negotiating parties, and by correctly managing the legal proceedings which must precede any investment. This also includes examining the business's financial position with banks and credit companies, while managing and minimizing commercial and financial risks.
What is the nature of the partnership between you and the entrepreneurs?
There are different ways of investing in startup companies. One way is through a partnership. In order to form a legal partnership that does not deprive any of the parties, everything must be done legally and transparently. Are you interested in investing in an Israeli startup? You better take a lawyer with you, and this is not just a recommendation. Registration of the partnership, advice regarding the distribution of profits and the degree of your involvement in the startup as investors, questions regarding taxation and asymmetrical partnerships, what happens later in case of an exit, the distribution of shares in case of a public offering, the risks assumed by each partner, what each partner keeps in case the partnership is liquidated, who owns the intellectual property rights regardless of investment – these are all questions that only skilled lawyers can answer. Such lawyers can also conduct negotiations with the sensitivity and decisiveness necessary to protect you. The legal wording of contracts and agreements is binding, and therefore these must be drafted accurately, so that they cannot be potentially refuted in court, if it ever comes to that.
Eli Shimony - Israeli law firm representing clients on all civil/commercial legal issues in Israel. For any questions please contact us and we will be happy to assist.
Email: [email protected], Tel: +972-52-2769773, +972-3-5507155.
The above article is a general information only and it is not intended to replace a legal advice.