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Israeli tech startups flock to US amid uncertainty at home

Israeli tech startups flock to US amid uncertainty at home

In recent years, there has been a noticeable shift among Israeli tech startups towards incorporating in the United States, particularly in Delaware. This trend comes as a result of several factors, including attractive funding opportunities from well-capitalized U.S. investors, favorable pro-business policies, and concerns surrounding political and judicial changes in Israel. The shift marks a departure from the past decade, during which Israel had successfully encouraged more startups to establish their legal identity within its borders.

The decision to incorporate in the United States carries implications beyond just legal identity. While it might not lead to a mass exodus of jobs overseas, the move can impact tax revenue distribution and other economic factors. Approximately 14% of Israeli jobs are within the tech sector, highlighting its significance in the nation’s economy. Registering companies or intellectual property (IP) abroad could potentially alter tax obligations, affecting government income.

One of the key drivers behind this trend is the appeal of Delaware’s business-friendly environment. Delaware is renowned for its pro-business stance and its status as a tax haven due to its low corporate taxes and the absence of state sales taxes. Entrepreneurs and investors have pointed to the benefits of incorporating in such an environment, which could facilitate smoother business operations and potentially more favorable tax liabilities.

However, another compelling force propelling this shift is the planned judicial overhaul in Israel. The government’s intention to revamp the judicial system has sparked concerns about potential impacts on democracy and legal stability. This uncertainty has led some entrepreneurs and investors to consider incorporating their startups abroad to safeguard against potential political and legal risks. While the reforms are not directly aimed at the tech sector, their broader implications have sown seeds of doubt among business leaders.

Ian Amit, a former Israeli military officer and founder of an artificial intelligence-based cloud security firm called Gomboc, exemplifies this sentiment. Amit is choosing to register his startup in Delaware due to the perceived corruption and unpredictability associated with the ongoing changes in Israel’s legal landscape.

The potential economic consequences for Israel are significant. The nation’s tech industry constitutes almost a fifth of its GDP and contributes around 30% of tax income. Thus, any disturbance in the tech sector could reverberate through the broader economy. The uncertainty surrounding the judicial overhaul has already led some entrepreneurs to vote with their feet. According to an Israel Innovation Authority (IIA) survey, the proportion of new Israeli tech startups incorporating in Delaware has surged from 20% in 2022 to as much as 80% in 2023.

The chairman of IIA, Ami Applebaum, suggests that the upheaval in the judicial system has raised concerns among investors, who generally dislike uncertainty. This sentiment aligns with the observation that existing Israeli companies are not only incorporating in Delaware but also expanding their operations beyond Israel’s borders. Yair Geva, a partner at Herzog, Fox, and Neeman law firm, highlights that the issue extends beyond incorporation and encompasses a broader operational concern.

A Startup Nation Central survey indicates that approximately 8% of Israeli startup/tech companies have already started relocating their headquarters abroad, with an additional 29% expressing intentions to do so. This migration is influenced by various factors, with some entrepreneurs emphasizing that the decision is grounded in business considerations rather than political ones. Israel’s tech sector heavily relies on foreign investments, and uncertainties in the domestic landscape, coupled with shifts in global funding dynamics, might be driving companies to seek more stable investment environments.

Despite the economic rationale, concerns over the political situation in Israel continue to cast a shadow over the tech startup landscape. Adam Fisher, an investor at Bessemer Venture Partners, acknowledges the uncertainty but refrains from viewing it as a complete deterioration of Israel’s tech appeal. He suggests that the shift towards incorporating in Delaware is more about choosing certainty in a landscape that has become increasingly uncertain due to political changes.

Ayal Shenhav, from law firm Gross & Co., argues that the trend of incorporating in Delaware is partially psychological, fueled by a sense that the local stability may have diminished. He clarifies that this isn’t a direct indictment of the judiciary’s integrity but rather a reflection of the perceived instability. Yaron Samid, managing partner of TechAviv Founder Partners fund, underscores that regardless of where startups are incorporated, Israel’s tech prowess remains strong due to its wealth of talent.

the growing number of Israeli tech startups choosing to incorporate in the United States, particularly Delaware, is a response to a confluence of factors. While business advantages and tax considerations are prominent drivers, concerns about the ongoing judicial overhaul and its potential implications on stability and democracy have added an element of uncertainty. This trend signifies not only a shift in business strategy but also reflects the interplay between economic, political, and psychological factors within the dynamic landscape of Israel’s tech sector.


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