Startup Company Formation in Israel 2025

The process of establishing a start-up company

The complete legal guide for the beginning entrepreneur

How to establish a start-up company? - The most comprehensive guide for the beginner entrepreneur - How to set up a start-up - The process of setting up a start-up - How to set up a start-up company - All the steps for setting up a start-up company - A law firm that specializes in setting up a start-up company in Israel - Option plan for employees

Hello and welcome to my guide. My name is Tamir Hodorov and I am a lawyer for a startup with a lot of experience and very deep knowledge.

I have been a member of the Bar Association since the end of 2015 and deal mainly in the field of corporations and securities.

Besides my education and experience as a corporate lawyer, I also graduated with a master's degree in business administration (MBA) from Ben Gurion University, with a specialization in finance (finance and securities) with an average grade of 95.53. This education allows me to see and manage details that are both legal, accounting, economic and financial at the same time.

It's amazing that as much as we searched the internet we didn't really find a comprehensive and full legal guide of all the things a stable startup really needs.

My goal in this guide is to teach you about the entire legal side of a start-up company. What is a start-up company, who can open a start-up company, when should you open a start-up company, how do you open a start-up company, how long does it take to open a start-up company, and what do you do after the company is opened.

It is true that a start-up can be established without any legal planning, but after finishing this guide you will know why legal planning is needed for a start-up, and you will be able to plan very well the opening of your new start-up. You will also understand why it is recommended to go through the process of establishing a start-up together with the legal support of experienced start-up lawyers, based on in-depth knowledge and broad experience, and why it is worthwhile to open a start-up company only by adapting it to the exact current and future needs of you and your partners, and your investors.

This guide is logically divided into the most essential questions: what, who, why, when, and how.

So let's get going.

Introduction: the economic / business side of the process of establishing a start-up
To establish a successful start-up, it needs to be practical at its core. That is, it should be a solution that can be implemented, a solution that can generate value with it, and a solution that can be profited from well enough to continue to implement it over time.

In general, establishing a startup consists of three very basic things:

Finding an idea for a start-up: every good start-up starts with finding a solution to a certain problem or need that many people have.
Feasibility test for the idea: after you have found your solution to the problem, you need to check its feasibility to be financially successful. This is where market tests come in, and the construction of the business plan that includes an assessment of future expenses and income, required investments and expected returns on the capital.
Finding a founding partner: although a partner is not required for the establishment of the start-up, it seems that people in general are able to succeed better when they cooperate with each other. It seems that finding the right partner is one of the ways to create and maintain motivation.

The process of establishing a start-up: the legal side of the start-up company
Now we will talk about what we specialize in - all the legal aspects of a startup. The process of establishing the start-up through the establishment of a start-up company.

Distinction between "start-up" and "start-up company"
The following two important concepts must be distinguished:

- The start-up itself, which is the project, enterprise, or business.

- A start-up company, which is a limited liability company for all intents and purposes, which is the owner of the start-up.

The start-up is the business activity, it is what we do. He is the project, he is a business itself. On the other hand, the start-up company is the owner of this business activity. The founders of the start-up are actually the owners of the start-up company.

The importance of establishing a start-up company
You can think of establishing a start-up company like constructing a residential building. The most important thing in the construction of a residential building is of course the people who will live in it, not the walls themselves. However, it is necessary to build the building in the strongest way possible, using the highest quality materials and the most advanced methods, so that the building will last forever and that the people who live in it will live in it safely and will not be harmed by anything.

In this image, the people are the startup, and the building is the startup company.

Another image? Safe for the bank: inside the safe the money and diamonds are the start-up. The walls of the safe, the locking and warning mechanism, or the entire shell, are the start-up company.

A startup lawyer is basically a contractor. He builds the structure correctly and according to stages. First the foundations of the building (writing the founders agreement for the startup, establishing the limited company, writing the articles of association) and then building the building shell (owner loan agreement, investment agreement, trademark registration, employment agreements, intellectual property agreements, etc.).

The stages of establishing a good and stable start-up company

Founders agreement for a start-up
If there is more than one founder of the start-up, it is highly recommended to prepare a founders' agreement for the start-up with a lawyer for the start-up. The date on which this agreement was signed is a significant advantage, and it is desirable to prepare to sign it at the very beginning.

The founders' agreement is an agreement between the entrepreneurs who are the future shareholders, which binds them to each other in things that have no place in the startup company's articles of association. For example, while in the articles of association of the start-up company it is possible to write things concerning the question such as what majority of the shareholders is needed to make a decision on the liquidation of the start-up company (closing the company), then in the founders' agreement it can be written that the founders are required to try to resolve the substantial conflicts between them in a friendly manner before resorting to liquidation The start-up company.

The statutes talk about the relationship between the founders and the start-up company in terms of ways of conducting or carrying out legal actions such as making decisions in the company, what shares are there in the company, how many shares can be issued, etc., but the above examples are relations between the founders and the company from an economic and financial point of view, and therefore they are rather in the founders' agreement.

Because the shareholders will also be the first employees of the start-up company, the founders' agreement regulates within it the issue of division of roles between everyone, and what each does, how many hours a month he will do it, what the minimum or maximum salary will be, etc.

A good founders' agreement for a start-up will also talk about ways of financing the start-up company in its first steps, when to distribute profits from the company to the shareholders, and other issues related to the core of ownership in the company and the return from it. For example, if you want each founder to pay a loan of NIS 100,000 to the new company, or to work in the company at least 40 hours a week, or to receive a maximum/minimum salary in the first year, etc. The place where these obligations and rights should be regulated is in the founders' agreement, not in the articles of association of the start-up company.

In the founders' agreement for a technology start-up, there will be clauses that talk about the transfer of ownership of the intellectual property, from the founders to the start-up company. This section is extremely critical for a start-up company that wants to raise money from investors in the future. A founders' agreement for a start-up usually also stipulates confidentiality and non-competition clauses for the entrepreneurs in the start-up company's activities, meaning that they will not use the company's trade secrets for their personal benefit, and that they will not "steal" customers or work from the company.

Another positive feature of the founders' agreement is that it is not part of the company's documents and therefore it is not in the company's file at the company registrar. In other words, the founders enjoy confidentiality or at least maximum privacy as far as the founders' agreement is concerned.

You have to decide what happens if someone retires in the middle, whether you close everything or continue without the one who retires.

When closing what is done with the startup's distribution lists, which partner do they go to in the liquidation.

A founders agreement for a startup is actually part of the set of startup agreements that we will talk about later in this guide, but we are placing it here because this is its place in chronological order in the process of establishing a startup. It is actually the first thing that entrepreneurs have to do, and it will be the core of establishing the start-up company.

Do not take templates from the Internet! A founders agreement is a relatively cheap document, and it should be tailored to the dimensions of the signatories. Founders agreement templates from the internet are usually there because they are of no economic value to the person who uploaded them there, or they were tailor-made for those who signed them in the past but not necessarily for those who will sign them in the present (you).

As a startup attorney, we have extensive experience in the field and we will prepare a professional founders agreement for a startup. Our agreements are clear, and divided correctly. Our agreements are clear and unambiguous. Our agreements are accurate to your needs and not loaded with irrelevant details.

We can prepare for you a practical founders agreement for a startup, which will deal with exactly the issues that are important to you.

Opening a limited company

The basics of opening a limited company
We have written a guide for opening a company in Israel, which includes relevant and central questions such as: What is a company? What is a private limited company? What is a limited liability company? What is the difference between a company and a partnership? What are stocks? What is the difference between a sole trader and a company? Who is allowed to establish a limited company? What is the minimum number of directors required to open a limited company? What is the minimum number of shareholders in a limited liability company? Can an owner of a company be both a director and a CEO? Questions about taxation of a limited liability company and a lot of other relevant information. You can read answers to all these questions and much more, in the complete guide to registering a company in Israel - everything you need to know about establishing a company in Israel.

What are the advantages of establishing a start-up company?
Managing a start-up through a limited company is the most correct and accepted thing, since time immemorial. Because of all the advantages that a limited company can give to a start-up venture, of all kinds, it seems that it is simply a shame not to take advantage of them. In fact, it is almost impossible to establish a startup without establishing a startup company.

Below we list some of the main advantages for the entrepreneurs in establishing a start-up company:

Separate legal entity
A start-up company is a separate legal entity, and therefore it is separate from the owner. The "incorporation screen" exists between the company and its owner. This means that the company owns the startup; is the owner of the patents or copyrights; And of course she also owns the debts; She is the employer of the workers, etc. Everything is separate and independent from the owner of the company itself - you are the founders.

Limitation of liability
The start-up company protects its founders from the financial risks involved in operating the start-up that the company operates. This is a huge advantage that makes it easier for entrepreneurs to invest in establishing a start-up that will contribute to the economy in which they exist.

Except in very exceptional cases where the court does what is called "lifting the curtain", the founders cannot be required to pay the startup's bill if it fails. This means that when you choose to manage a startup it is better to manage it within a startup company.

Status and image
A start-up company has costs and therefore the very fact that you have a start-up company is seen as if your start-up is important enough or has a big enough potential that it will pay for you to manage it through it. In addition, managing the start-up through a start-up company conveys to investors, suppliers and customers that this is a serious and orderly business.

Fundraising
One of the reasons why it is worthwhile to open a start-up company is in a situation where the entrepreneur is required to raise money for him. In such a situation, he should actually sell shares of the start-up company, which alone will be the owner of the aforementioned start-up. No investor will agree to invest money in a project in which he does not have ownership, and the way to obtain this ownership is by selling the shares of the start-up company that is the owner of the same project.

Incentives for employees
In a start-up company, it is possible to give incentives to employees, in the form of shares or options, according to their progress in the start-up or according to their contribution to it. It is not possible to give shares or options without the existence of a start-up company.

Accepting partners and removing partners
The start-up company provides great flexibility in managing the start-up in relation to existing and future partners, and in relation to investors. The way to bring in partners or investors is to give or sell them shares, and the way to get them out is to take or buy the shares from them.

Establishing a startup company in Israel only with a startup attorney!
It is important to establish a startup company only with a startup lawyer. The fees of a startup attorney for establishing a startup company are very negligible, and the truth is that compared to the legal work required of a startup attorney to establish a startup, the cost of establishing a startup company is very small

So why, after all, do the process of establishing a start-up company only with a startup attorney? The reason is simple but important: as the company plans to raise investments through the sale of shares, it is necessary to define the amount of shares in a way and in a number that will make it easy and convenient to issue shares to investors. From our experience, we have succeeded To get to know entrepreneurs who opened a start-up company thinking that establishing a start-up company does not require deep thought. When the entrepreneur asked us to make an allocation to a new investor who arrived, we discovered that the entrepreneur (or the person who helped him open the company) opened it in such a way that all the shares of the company were already allocated to the existing shareholders, and The "registered share capital" of the company was too small and it was not possible to make an additional allocation, even of a single additional share. Now a simple share allocation has become a much bigger and more expensive saga of increasing the "registered share capital" in order to be able to make an allocation afterwards stock.

And also, in the process of establishing a startup, it is also mandatory to write a special company bylaws written by a startup attorney. The obligation is not legal, but business. You can say that it is negligence not to write special bylaws for a startup company written by a startup attorney.

Writing a special company articles of association for a start-up
The company's articles of association constitute the main and essential incorporation document of the company. The company's articles of association are actually a document that specifies the rules of conduct of the company itself, and the shareholders in relation to the company. It can be said that this is a type of contract between the founders of the company, which defines exactly what is allowed to be done in the company, what is prohibited, and how to do things in the company. At the same time, regarding changing the articles of association after the opening of the company, unlike a normal contract, the default is that the articles of association can be changed by a simple majority of the shareholders, without the need for unanimous consent of all.

In the process of opening a limited liability company, you can use the "existing statutes", that is, a generic and short statute with 6 sections proposed by the state, but it will in no way be suitable for a start-up company. In the case where the existing statutes are in use, there will be many sections of the Companies Law which will apply to the conduct of the company. Sections such as the procedure for making decisions by the shareholders, the procedure for making decisions by the board of directors, by what majority can a decision be taken to dissolve the company (close the company), and many other procedural sections that are good for most limited liability companies But not for a start-up company.

The reason that a start-up company requires a special bylaws written by a startup attorney is that a start-up company almost without exception has the intention of raising capital through the sale of shares. The bylaws will dictate the way the founders and investors conduct themselves in relation to the company. It is critical to write special bylaws for the company Start-up, which will take into account the whole of the future needs concerning the shares, the shareholders, the board of directors, and the relations between all these. Almost every procedure can be defined again, so that the provisions of the procedural companies law will no longer apply to the company, among other things.

√ The rights and obligations of the shareholders - the founders and investors

√ Any instruction regarding the ways of managing the company

√ Determining the minimum and maximum number of directors, ways of appointing a director, ways of firing a director, ways of making decisions, and more.

Before opening a company, you should think about the various situations that will be relevant later on, and handle them within the framework of the special regulations. In the simplest example: if you had 10 shareholders and you were required to hold an annual meeting, would you want to gather them all physically each time? Or would it have been more convenient for you to have a Zoom call with everyone? This detail is required to be regulated in special regulations, otherwise the decisions made at Zoom will have no legal effect.

The special bylaws are not mandatory, but they are highly recommended, because the bylaws are a very important component of the limited company. We can prepare special bylaws for the company, based on our experience and expertise in the industry in which the new company intends to operate. This is especially true for companies that intend to be highly active in the future. Also, if the founders of the company also drew up and signed a founders' agreement for the start-up (see above), the lawyer should make sure that the company's special articles of association reflect what is stated in the founders' agreement.

Special articles of association cannot be submitted to the registrar of companies without a lawyer, because the signatures at the end of the articles of association must be verified by an attorney.

For a start-up company that wishes to raise investors, it is good to know that in order to change the articles of association it is necessary to obtain the consent of the majority of the shareholders, therefore it is easiest to change the articles of association when there are still as few shareholders as possible - in other words, at the stage of registering the company Ltd. or a little later. Others, it is better to replace the current regulations with special regulations before starting to raise investments from experience, for the investors it also seems more serious.

Sometimes changing the articles of association is an action initiated by the potential investor and according to his demand, before the investment and as a condition for it, and this is to allow him to gain more control of the company and protect his investment. It is highly recommended to prepare special regulations before meeting such a demand from a potential investor, because then the founders will be in a disadvantageous position where all the most essential conditions are dictated to them in the start-up company.

Opening a bank account
The start-up company is a separate entity from the founders, therefore it is required to open a bank account in its name, which is separate and completely different from the bank accounts of the founders.

In this bank account it will be possible to deposit investment funds from investors.

In the bank account of the startup company, it will be possible to manage the business, local and international activities.

Registration with the Tax Authority
Registering the start-up company with the Tax Authority is a step that is never mandatory in Israel.

As long as the company is not registered with the Israel Tax Authority, it cannot receive any income from business. However, the company still exists legally.

A company that is not registered with the Tax Authority can still receive investments and give shares in return. A company that is not registered with the Tax Authority can still sign various contracts.

However, a company that is not registered with the Tax Authority cannot hire employees, because of the need to pay taxes on the employees. After all, it is not possible to pay social insurance, health fees and income tax on employees without appropriate files for the company.

Another disadvantage of the start-up company not being registered with the Tax Authority is that the company will not be able to claim VAT on its expenses. For example, if the company paid some entity to receive a service, perhaps rented a car and paid gas, then it will not be able to submit these expenses for VAT refund purposes "from.

On the other hand, a company that is not registered with the tax authority saves the current costs of the accountant (about NIS 1,500-2,000 per month).

As you can see, registering a start-up company with the Tax Authority has significant advantages and significant disadvantages.

√ If necessary, we can connect you to accountants we know, free of charge.

Startup agreements

Startup agreements are actually agreements that are special to startups. What makes startup agreements so important in a startup is that they actually shape the agreements between the core of the startup, which is the startup company, and all entities that come into economic-commercial, business, financial or legal contact with it.

Think of it like a painting. In the process of establishing a start-up company, at the beginning you have a smooth and white canvas. Nothing has been painted on it yet. So startup agreements are signed one after the other and create a painting on the canvas. Once startup agreements are signed, it is quite difficult to change them and it is really very similar to a painting that is difficult to change once you have drawn it. Therefore, what is required is a lawyer for a startup who knows how to "paint" beautifully and not "paint" ugly. In other words, someone is needed who knows how to make a quality "drawing" that is not crooked. It is very important that a startup lawyer has the experience and knowledge to prepare good and high-quality startup agreements. The process of setting up a startup depends on a startup lawyer to a huge extent.

Below we list the essential startup agreements that every startup must have at one point or another.

Intellectual property rights in a start-up company
The starting point of every start-up is one or more founders, who have an idea, and sometimes also some kind of development. The idea constitutes a trade secret, and the development constitutes copyright. Both the trade secret and the copyright are part of a larger topic called "intellectual property".

"Intellectual property", according to our definition, is essentially all ownership rights over intangible things.

It can be a patent which essentially gives the patent holder ownership in the use and production of profit from processes and inventions.

This can be copyright, which gives the right holders ownership in the use and profiting of texts, including software code, recorded materials such as songs or recordings of courses and podcasts, photographed materials such as photos, videos or films, and more.

It can be a trademark, which gives the owners of the mark ownership in the use and profiting of names, signs, symbols, or colors that characterize their products for the purpose of creating differentiation in the eyes of the consumer.

It can be a trade secret, the essence of which can be, for example, the secret formula for making a delicious drink that is sold all over the world for tens of billions of dollars a year. A trade secret can be customer lists, lists, marketing, business plans, and more

Transferring ownership of the intellectual property to the start-up company
As part of the things that must be done after the establishment of a start-up company, the ownership of the intellectual property must be "transferred" in a complete and orderly manner, from the founders to the company.

Before the establishment of the start-up company, back in the stage when the start-up was no more than an idea and some development, all the intellectual property belonged to the founders themselves. However, once the company is established, it is the startup company that should own the intellectual property. Therefore, it is necessary to prepare a special document that transfers the ownership of the intellectual property from the founders to the opened limited company. This document is called the "Intellectual Property Rights Protest Letter".

The written declaration of intellectual property rights for the startup company is a short and relatively simple document written by an attorney for the startup, but its significance for the life of the startup company is enormous! An experienced potential investor will never invest even one shekel in a startup company that is not the declared owner of all rights In the intellectual property of the start-up. No investor would want one day, the founder of the company to claim that he actually owns the software code, or that he owns the idea, and in fact the company has no right to use the code / idea without his permission and without paying him some kind of consideration Ready to invest in a company that you don't know if it really owns the essence of the business?

In fact, the inspection of the startup company's intellectual property rights by a startup attorney is one of the first, main, and most rigorous checks that potential investors do on a company, before they finally decide to invest and sign an investment agreement in a startup company.

Owner loan agreement
An owner loan agreement is a loan agreement between at least one of the founders and the start-up company. As mentioned, a limited liability company is a separate legal entity from the founders, so even though the founders sign "both sides" of the contract, it is a legal agreement for all intents and purposes between the start-up company and the founders.

Purpose of owner loan agreement
The purpose of the owner loan agreement between the founders and the start-up company is to allow the founder to recover his investment money in the company.

The first fundraising in a startup is probably the founder's own investment in the company. The funds that the founder invests himself in the company can be as a result of investing all of his personal capital in the company, and even as a result of taking out personal loans from the banks. The founder is the locomotive that moves the start-up train, so the most important thing is to make sure that the entrepreneur does not collapse financially. When the start-up begins to succeed in raising funds or selling products/services to customers, the first funds that the company releases should be to investors, and the founder is actually the first investor.

The loan agreement written by an attorney for the startup indicates the amount of money the entrepreneur invested in the company, and defines this amount as a loan that the company must repay.

Taxation and owner loan agreement
The owner loan agreement has one huge advantage. It allows the entrepreneur to get back his investment in the start-up without the aforementioned payment being considered a dividend. There is a 30% tax on the dividend, but there is no tax on the owner's loan repayment, since it is not income from a business. We note that there may be a small taxation, on the interest from the loan, which the entrepreneur can choose to collect or not collect from the company for the loan he gave.

For the sake of illustration, let's say that the entrepreneur invested in the startup an amount of 300,000 for the needs of code development, product design, establishing the company, lawyer services for the startup, accountants, etc., at an interest rate of 1% per year. The owner loan agreement was signed for an amount of 300,000 which can even be updated from time to time. After a year the start-up manages to raise a very large investment, or even start selling products/services and generate income. At this stage the entrepreneur can make the start-up company make a decision to pay him the loan. The developer will receive the amount of 300,000 back, plus 1% interest. The entrepreneur will not pay tax on the 300,000 because it is an investment return, and he will only be taxed on the 1% interest on the loan. 1% of 300,000 is 3,000, and the tax for the purpose of the example is 31%, therefore the tax will be only 930.

Release and indemnification letter for the directors
A letter of release and indemnification for the directors, written by a lawyer for the startup, is a type of insurance contract that is granted to the directors against situations where the directors are sued by shareholders or suppliers due to a breach of duty of care.

Directors are the top managers in the company, and they dictate the most essential things in the company. They are the ones who sign bank account opening documents. They are the ones who determine the CEO's salary. They are the ones who decide on receiving investment, allocating shares, or transferring shares.

Directors have a duty of care, which is basically the duty to act in a way that a reasonable director would act under the circumstances. The violation of the duty of care is essentially the negligent act or omission. In simple words, the directors must not be negligent in the scope of their duties, and they may at any moment be sued for any damage they have negligently done to the company or any third party in the scope of their duties.

A letter of release and indemnification for the directors is basically a release on behalf of the company from responsibility for any damage caused to the company through negligence, as well as "indemnity" (compensation) from the company for any damage caused to the director following a claim by any third party for an act or omission that the director committed as part of his position in the start-up company.

This document is not mandatory to prepare, but from the above you must understand how useful it is to prepare such a document for the company.

Capitalization Table
"Capitalization Table", or by its name in English "Cap Table", or for short "Cap Table", is a table that shows how many shares each shareholder owns, and what is the percentage of his holdings.

When you register a limited company, the company's articles of association write how many shares each founder receives. For example, if you issue 1,000 shares to Yossi and 1,000 shares to David, their holdings will be 50%-50%. But if you issue 1,000 shares to Yossi and 1,000 shares to David and 1,500 shares For Shimon, their holdings will be:

28.57% to Yossi

28.57% to David

42.85% for Shimon

This is a rudimentary form of a "table of share capital". When there are many shareholders, a detailed capital table in Excel is required which calculates the amounts of shares of each and the relative percentages that each shareholder has.

In the advanced stages of the startup company, this share capital table is regularly written and edited by a startup lawyer, and it becomes a central document of enormous importance, because it will reflect the relative holdings of all the founders, the investors according to the chronological order of their investment, as well as the The options that each employee has, and the table will also include the total number of options that are still in the company's "option pool" (we will talk about options comprehensively later).

Share capital table in raising investments
When a potential investor arrives, one of the basic things he wants to see is a "before and after" table, meaning a share capital table of the existing situation before his investment, and another share capital table which shows the future situation after his investment. The "after" table should reflect the amount of shares he wishes to purchase in the startup company, and the amount of holdings in percentages that will constitute the number of these shares after the allocation of shares.

Employment agreement for the CEO / service provider agreement for the CEO
The start-up company is a separate legal entity and therefore its profits are not the profits of the entrepreneurs. How then can the entrepreneur enjoy the profits of the start-up company he owns? He has to withdraw the profits from the company's pocket to his own pocket. There are three ways to do this.

Payslip - employment agreement for the CEO of the startup
The simplest way to enjoy the profits of the start-up company is to draw a salary from the start-up company. The director of the company, who is also the owner, can make the company hire him as CEO. When you think about it, it may seem a little strange, but this is the legal reality. The owner is also the director, and he decides on behalf of the company to hire himself as an employee CEO of the company, And also sets his own salary. The approved employee will receive a regular paycheck, in which he will pay social security, health fees, income tax, and legal deductions.

In order to be employed by the start-up company, the CEO entrepreneur is required to prepare an orderly employment agreement written by a lawyer for the start-up and which will be signed between him and the start-up company.

Issuing an invoice for a service
The second way to enjoy the profits of the start-up company is by issuing a tax invoice, as a sole trader, for management services to the company.

The entrepreneur who is the sole trader is registered for VAT as a licensed trader, and issues an invoice to the start-up company once a period (let's say once a month, but not mandatory), in exchange for paying a salary, the amount of which can vary.

The advantage of this method is that the tax on these revenues from the management services can be offset by expenses that the individual trader had, as part of the provision of his management services. Also, the entrepreneur can play with the amounts as he wants, and he can also play with the frequency of payments as he wants. For example, he can only pay himself a salary once every six months, three times a month, etc.

In order to receive payments from the start-up company for management services, the CEO entrepreneur is required to prepare an orderly service provider agreement written by a lawyer for the start-up and which will be signed between him and the start-up company.

Both the employment agreement and the service provider agreement will reflect the income you wish to receive, in a way that will also take into account your and the company's future needs.

Dividend distribution
The third and last way to enjoy the start-up company's profits is through dividend withdrawal. "Dividend" is a sum of money from the start-up company's profits, which the start-up company decided to distribute to the shareholders from the company's coffers. It must be remembered that the start-up company is a separate legal entity, therefore the bank account of the start-up company is not the bank account of the entrepreneurs. Therefore, a dividend is an amount of money that the management of the start-up company decided to distribute to the shareholders, from the company's bank account, to the shareholder's bank account.

It must be remembered that dividend distribution is a distribution to all shareholders in a manner proportional to the amount of shares they hold. Therefore, all shareholders will receive a dividend, including investors, employees, etc., and it cannot be decided that one will receive and the other will not. For example, if Yossi owns 75% of the company's issued and paid-up share capital, and Shimon owns 25% of the shares, and the company's management decided to distribute NIS 100,000, then Yossi will receive NIS 75,000, and Shimon will receive NIS 25,000, and you cannot pay a dividend to one without paying a dividend to the other.

As of 2024, the amount of tax paid on dividends is at a rate of 30%.

In the case of dividends, it is not required to prepare any agreement regarding dividend distribution.

However, some important things about dividend distribution:

✖ Legally, only profits can be distributed! It is not possible to distribute funds originating from investments, because investment is not income from a business and therefore investment funds are not considered profits that deserve to be distributed (in fact it is possible but only with the approval of a court).

✖ A dividend can only be distributed in an amount whose distribution to the shareholders will not cause the company to enter into financial difficulties that could endanger its economic existence. In other words, a dividend can be distributed to the shareholders only if the company can meet its current obligations and they will not put you at risk of insolvency (as mentioned, in fact, a dividend can be distributed even without this condition being met, but only with the approval of a court)

✖ Dividend income is a form of income from which expenses cannot be deducted. In other words, a person who receives a dividend cannot reduce his tax payment by deducting business expenses.

√ Dividend income does not pay social insurance or health fees.

Employment agreement for employees of the start-up company
An employment agreement for employees of the start-up company is not exactly an employment agreement for employees in a regular company.

On the one hand, in a start-up company the salary should be extremely low so as not to burden the cash flow of the start-up company. After all, the flow in the initial stage consists of income from investments only, and not from sales of the start-up's core products/services. If the investment money runs out, the fuel for the train runs out.

On the other hand, it is necessary to give some kind of adequate compensation for the low salary and the risk of uncertainty involved in working in a start-up company due to the fact that if the company fails to rise, it may close sometime in the future, in the absence of additional investments. Such adequate compensation will also reflect the chances of success of the start-up company in the future, in the form of participation in the owner's profits. In other words, the company's employees will receive shares and/or options in the start-up company.

An employment agreement for employees of a start-up company, which was written by a lawyer for the startup, reflects exactly the balance between the need of the start-up company to maintain the financial resources on the one hand, and the need of the company on the other hand to keep the employee with it for a long time.

what are "options"
I will try to describe what options are in one sentence and in the simplest form. "Option" is short for "stock option" and is a document that gives the right to receive one share from the company subject to certain conditions such as a certain date or a certain payment (called the "option exercise price"). In the plural it is "stock options" or in short - "options".

As mentioned, an option is a right, but not an obligation, that is, the holder of the option can choose to exercise it for a share or not to exercise it for a share. In practice, the exercise right is worthwhile only when the share price is greater than the exercise price. If the exercise price is NIS 0, then it is always worthwhile to exercise the stock option.

Shares are parts of ownership in the company, and they give the shareholder the right to receive part of the company's profits when the company's profits are distributed to the owners (dividend), according to his relative percentage of holdings.

It is customary to give the employees of a start-up company shares or options in the company, as a form of consideration that is not in cash such as a salary, and this within the framework of the employment agreement and during the period of their employment in the company. In fact, it is more common to give employees options than shares, and this is because as long as the options are not exercised the employees have no voting rights or receive profits from the company.

Vesting period
The employee's right to exercise the options will usually be subject to the employee's continued employment with the company in accordance with his employment agreement with the company. This is the "ripening period".

Almost without exception, the options are granted "in pulses", as part of an option grant plan, which is described in their employment agreement. For example, during the first 12 months of work, no options will be given (an outline called "Cliff"), and this is to incentivize the employee to work with the intention of remaining in the company in the long term, to be absorbed and assimilated into his position in the company completely, before he becomes a "partner forever" through the shares he will receive . After 12 months, 1% in the company will be given, after that every six months a quarter of a percent will be given, up to a maximum of 5 years, which if the employee has completed all of them, he will have holdings of 5% of the company's shares, at the time of signing the agreement. Why this suffix "at the time of signing the agreement"? Because apparently during those 5 years the start-up company will raise investments from investors, which will slightly dilute the percentage of the employee's holdings.

There is also a concept called "Reverse Vesting". This is a mechanism whereby the employee is given all the options in advance, but a "buy back" mechanism is applied to them, the company can "buy back" all the options at the beginning, and once in a while there is a certain amount of options that the company can no longer call back, for example six months later the company Loses the right to buy back 1,000 options out of the 4,000. That is, the employee receives all the shares to which he is entitled, but if he does not meet certain pre-determined conditions, a sale is imposed on him, according to which the company has the right to purchase these shares from him. This is usually less relevant to the employees, but more to the founders, for fear that one of the founders is unstable and may simply slow down his activity in the company, but remain with the same amount of shares.

Employee Stock Option Plan - ESOP
As part of granting options to employees, an employee option plan must be written by a lawyer for the startup. "Employee option plan" is a document that details all the technical conditions of granting the options, including the ways of exercising the options and exchanging them for shares, reference to taxation and payments, etc.

Section 102 of the Income Tax Ordinance
It is required to prepare an employee option plan to use section 102 of the Income Tax Ordinance. Section 102 of the Income Tax Ordinance talks about the allocation of options and shares to employees and officers, with the exception of controlling owners, that is, with the exception of the entrepreneurs of the start-up.

When you give options to an employee, it is considered a "capital" tax event, meaning you are not giving them money, but giving them an asset that produces money (any dividends the company will ever pay in the future). You give him a tree and not the fruits. There is a 25% tax on the grant of a "capital" asset such as options, but in a situation where the company or its shares have no real value, especially at the beginning, this is not a problem. The problem starts when the value of the company increases - for example when there is an investment of 10 million dollars in the company. Suddenly there is a "ghost income" - the value of the employee's options increases 100,000 times and he has to pay a huge amount to the tax authority. But on the other hand, this is exactly the ambition of the options plan: to give the employee an incentive to invest in the company so that its value increases and then his shares are worth more. This is where S. 102 of the Income Tax Ordinance comes into play, which provides a deferral of the tax payment for a period of one or two years from the tax event - depending on the route chosen.

There are two possible routes to choose from:
Work income track: The choice of the employing company to allocate options in the work income track requires the employee to entrust the options to a trustee for a period not less than 12 months (blocking period). At the time of the exercise of the shares derived from the options assigned to the employee, the employee will be credited with labor income according to Section 2(2) of the Ordinance in the amount of the value of the benefit and the employee will be charged a marginal tax in accordance with Section 121 of the Ordinance - that is, a tax of up to 50%!

The advantage of this route is that the start-up company will be able to deduct expenses equal to the value of the benefit to the employee.

* Sub-route of employment income: Non-trustee allocation: When the employee receives an option for a share that is not listed for trading on the stock exchange, the employee will not be taxed at the time of the grant, and at the time of exercise he will be charged income tax on employment - just like the route of income from employment, that is, a marginal tax of up to 50%

However, there are two differences from the main path of the "work placement path":

- There is no blocking period, and it is possible to transfer the options to direct holding by the employees. This point has no advantage if the options were granted with the limitation of the "vesting period" described above.

- The start-up company will not be able to deduct expenses equal to the value of the benefit to the employee.

Capital gain route: requires the employee to deposit the options with a trustee for a period not less than 24 months. At the time of realization, i.e. at the time the share is transferred from the trustee to the employee or at the time the share is sold to a third party (by the trustee), whichever comes first, the capital gain that accrued to the employee will be taxed at a tax rate of 25% only.

The disadvantage for the start-up company in this route is that it does not allow the company to deduct the employee benefit as an expense.

In practice, since amendment 132 to the ordinance, most companies that allocate options to their employees, adopt the capital gain route.

Section 102 applies to shares as well as options. The section applies to every employee, including an office bearer (director), but with the exception of a controlling owner, that is, with the exception of the entrepreneurs themselves, for whom there is a different taxation route.

The conditions for receiving the tax benefit of S. 102 of the Ordinance:
Basic condition: This is an employee. The tax benefit is not given to an individual dealer who provides services in a startup.

The shares or options were entrusted to a trustee for the periods relevant to the routes (below).
There is an employee stock option plan (ESOP)
The tax official should be notified of the taxation route the company has chosen, at least 30 days before the allocation date.
The employee option plan and the trustee should be approved by the assessor.

Nondisclosure Agreement (NDA)
A confidentiality agreement, in English Non-Disclosure Agreement or NDA for short, is an agreement written by a lawyer for a startup and made between parties for cooperation negotiations, for the sale of shares to an investor, between an employee and an employer, etc. Basically, the agreement is intended to protect the company's secrets from a person who may use confidential information received from the company when considering the possibility of achieving some kind of business goal.

Intellectual property agreements for service providers in Israel or abroad (PIAA)
An intellectual property agreement for service providers has a long name: "Non-Compete, Confidentiality, Proprietary And Inventions Assignment Agreement", or in English: Non-Compete, Confidentiality, Proprietary And Inventions Assignment Agreement, and is known by its abbreviated name PIAA.

It is mandatory to prepare this type of agreement with a lawyer for the startup, and it is mandatory to sign it with any external person or body who is involved in the development of the product or is exposed to the development process or part of it. For example, who develops the prototype of the product, the factory that produces the product in mass production, the developers of the code in India or Pakistan or Ukraine, etc. Anyone who is not part of the company and is exposed to company secrets or develops things related to the company, is required to sign this agreement.

This agreement, written by a lawyer for the startup, is intended for any software developer, engineer, supplier or employee with whom the company intends to have a business relationship, and its purpose is to retain ownership of any intellectual property developed by that supplier. Copyrights, patents, trade secrets, designs, business plan development, presentations, etc. - anything related to intellectual property must remain your property, and this must be agreed upon by the parties before work begins, through the PIAA.

An agreement essentially ensures that the service provider who develops the company's products or services cannot claim to have partial or full ownership of the product or service. why? The enormous importance of this agreement is exactly the same importance as the intellectual property rights check letter to the start-up company that we discussed above. An experienced potential investor will never invest even one shekel in a startup company that is not the declared owner of all rights to the startup's intellectual property. No investor would want one day, one of the service providers who helped develop the company's product/service to claim that he actually owns the software code, or that he owns the idea, and in fact the company has no right to use the code/idea without his permission and without paying him any consideration.

In addition, this agreement obliges the service provider to maintain confidentiality regarding the company's confidential information, and also to refrain from competing with the company, that is, competing with the company's business and its customers by developing a product or service similar to the market in which the company operates, while using the business and confidential information that the service provider has accumulated under The work he did for the company.

The PIAA agreement must be drafted precisely so that it fits any provider you want to work with, without the need to add or change details in the agreement. During the life of the company, many PIAA agreements are signed between the company and the suppliers in the same wording, and these agreements are critical during the sale of the company ("EXIT"). This is because the buyer wants to be sure, through provable facts, that no former supplier intends to steal the company's secrets and start a competing company, or alternately sue the company for unauthorized use of the intellectual property, which it may now claim as its own.

We have a lot of experience with this type of agreements, and we are ready to draft one for your new start-up company as well.

Legal documents for a website

Website terms of use - Terms & Conditions - T&C
Terms of use on the website, or as they are called in English Terms & Conditions, or Terms of Service, are a legal document for all intents and purposes which specifies the conditions under which anyone who uses the website can use it. While on a promotional website of the start-up company the terms of use of the website are relatively simple, when it comes to a sales website, such as an online store, it is required to specify warranty conditions, product return policy, delivery policy, and more. The place to express all these conditions is usually in the site's terms of use.

Also, if there is a blog with content of surfers, or photos of surfers, the rights to these materials should be regulated in the terms of use of the site.

Privacy policy - Privacy policy
A privacy policy, or as it is called in English Privacy Policy, is a legal document different from the terms of use of the website, which specifies the way in which the information that the user of the website provides to the website during its use is used. The data collected can be general such as the type of system the surfer uses (computer, smartphone, tablet), the language of the device, the way the surfer behaves on the site in terms of how long he is on each page and which links he clicks. In the case of registering on the website or ordering products, the data can also be personal, such as name, address, phone, email, social security number and credit card number.

The privacy policy can be written in a very unfriendly way, and full of many unnecessary and cumbersome conditions. The trick is to be concise and simple.

Privacy laws in Europe - GDRP
European privacy laws apply to every European citizen resident. If the website of your start-up company is international and it is expected that European users will enter the website, it is necessary to adapt the privacy policy to the privacy laws in Europe (called GDRP for short in English). For example, if a surfer decides that he wants to delete his website surfing records, or delete his personal details from the company's records, the privacy policy should clearly contain the email to which requests for the removal of such information should be sent.

There are a few more adjustments to the privacy policy so that it is prepared according to GDPR laws. We know the field of GDPR very well and we can draw up a privacy policy for you that will be suitable for your start-up company's website, and will also be prepared according to the GDPR.

Advisory Board Agreement
Sometimes startup entrepreneurs want to show that they have business support from important or well-known people. It could be people who made beautiful exits, well-known people in the industry, it could be bankers, it could be well-known mentors, etc.

Many times these "consultants" do not accompany the company at all, but their very presentation in the start-up's marketing materials, or for example their presentation as part of the start-up team on the website, gives the new start-up a more serious appearance.

In exchange for their consent to the presentation of their name and image in the start-up materials, these "consultants" ask for monetary compensation or in shares. For this purpose, it is required to write an agreement that regulates the rights and obligations of the consultants and the start-up company. This is the advisory agreement, or advisory board agreement. In fact, in several such agreements, the entrepreneurs create a type of "Advisory Board", hence the name of the agreement.

Trademark registration in Israel and Globally
If you think one step ahead about marketing your product, you will understand that it is also worth thinking about registering a trademark that will be part of your brand. The company's trademarks can be the company's trade name, the product or service trade name, the company's logo, the company's slogan, the product's slogan, or the product's color(s).

Trademark search
Our office issues opinions in which we search for the requested trademark in Israel and abroad, to find out whether it is registered or can be registered.

The opinions determine the legality of the use of the trademark in the State of Israel and abroad. In addition, the opinions include the registration options of the trademark in the State of Israel and abroad, the list of competitors using the trademark, as well as the legal meanings.

Trademark registration in Israel and/or Globally
In order to register a trademark, it is first necessary to submit an application for the registration of the trademark in the State of Israel. Only then can the trademark be registered internationally through the World Intellectual Property Organization ("WIPO"). The WIPO organization in turn will take care of registering the trademark in all the countries in the world in which you request to register it.

After submitting the application in Israel, an application for international trademark registration can be submitted immediately, and there is no need to wait for the approval of the application and the registration of the trademark in Israel.

After a comprehensive search of the trademark, it is possible to estimate the possibility of registration in each and every country, as well as the cost of registering the trademark in the State of Israel, the USA, Europe and Asia.

After we open the start-up company for you, we can register a trademark for you in Israel, and also in any market where you want to market the product or service.

For our Trademark Registration page, click here.

Raising capital for a startup: raising investment for a startup
This chapter is so broad that it deserves its own special guide, which shall include the following fascinating topics:

Startup valuation
The Investment agreement
Document of understanding for investment
Adequate tests - Due Diligence
Dilution and anti-dilution
Finder Fee Agreement
Crowdfunding platforms (Peoplebiz, Exit Valley, Smart Funding)
Types of shares: ordinary, first, redeemable.
Debt: bonds, encumbrances.

Legal review of contracts you receive
Writing contracts is not all the work of a startup lawyer. As part of the business activity of the start-up company, companies or other people occasionally offer their own contract form. A lawyer for a startup should do a legal review of any such contract that you receive, to make sure that it is possible and safe to sign the contract.

Whether it is an office or factory lease, a prototype development contract, a product manufacturing contract, a distribution agreement or an investment agreement, there is no contract that we have not seen at Hodorov Law Firm. We have experience with all contracts.

Cost of legal review of a contract
Each contract is different in length and complexity. If you have a contract that requires a legal review, all you need to do to know what the cost of a legal review of a contract is, is to send it to us to receive an accurate quote.

Mentoring
Every idea needs a boost. The best ideas too. Our role is first of all to accompany the entrepreneurs in the endless path of entrepreneurship and establishing an important and valuable business. This is mentoring. Mentoring means receiving support from a person who has a lot of experience and has seen a lot of things and who can guide you in those times when you are walking with great confidence on a path that may not be the best.

But entrepreneurs who don't get good mentoring make more bad decisions cumulatively than entrepreneurs who do get mentoring. That mentor will be a person who will be very good to hear his opinion at crossroads.

You can say that good mentoring is a small addition that has huge results.

The benefit of receiving ongoing legal support and advice for your new startup is very great. No one is wise as someone with experience, but in the field of startups, in-depth knowledge is also required and not just experience. The benefit from experience without knowledge is low and much inferior to the benefit that is produced by information that is applied from a lot of experience. Therefore, the legal advice you will receive from us is very valuable to you.

The service we provide

Establishing a start-up / opening a start-up company
If you have come this far in reading the guide, I hope you already understand that you are in good hands for starting a company. We will open a start-up company for you quickly and efficiently. You are invited to contact us now free of charge to receive a free initial legal consultation with Adv. Tamir Hodorov, for the establishment of a startup with a startup lawyer, by phone +972-52-5690866 or by WhatsApp, or by contacting us in "Contact" through the website.

When you turn to the Hodorov Law Firm, you will find professional assistance that reflects extensive experience, efficient and high-quality solutions for opening a start-up company, with a minimum of time and costs. Contact us today to start the immediate process of opening a startup company in Israel / establishing a start up company in Israel.

We will accompany you from the beginning of the process to the end. We will help you and guide you according to our best experience, answer all your questions, and offer you solutions if necessary.

√ We will prepare a founders agreement for a startup for you

√ We will prepare for you special regulations for a start-up company

√ We will prepare for you all the necessary documents for the establishment of the start-up company.

√ We will open a bank account for you where you can deposit investment funds and pay expenses from it

√ We will prepare documents for the transfer of ownership of the intellectual property to the start-up company

√ We will draft an owner loan agreement for you between the founders and the startup company

√ We will prepare for you a release and indemnification letter for the directors

√ We will create a capitalization table for you

√ We will draft an employment agreement for the CEO / service provider agreement for the CEO

√ We will write an agreement for you for the employees of the startup company, including an employee option plan

√ We will draft an NDA for you

√ We will create intellectual property agreements for you for service providers in Israel or abroad PIAA

√ We will draft legal documents for the website - Terms and Conditions and a privacy policy.

√ We will search and register a trademark for you, in Israel and abroad

√ We will prepare investment agreements for you and accompany you in the various investment fundraising campaigns.

√ We will perform a legal review of all the contracts you receive

√ You will receive legal advice throughout the life of the startup, in all the small and big moments.

√ You will receive personal and close treatment regarding every problem, and also regarding every opportunity for success

√ You will receive fast and direct service, with exact schedules for performing each operation and service.

√ You will get the benefit of our extensive experience in establishing a start-up.

√ If necessary, we can connect you to accountants we know, free of charge.

Contact us now free of charge to receive a free initial legal consultation with attorney Tamir Hodorov, for the establishment of a startup with a startup lawyer, by phone +972-52-5690866 or by WhatsApp, or by contacting us in "Contact" through the website.