A Guide for Israeli Start-Up Companies Entering the U.S. Market Through New York StateThrough New York State

Key Legal and Business Issues

Asaf Hahami, Esq.

April 30, 2014

The New York State Start-Up Scene

� “Start-Up New York” Program

– startup.ny.gov– startup.ny.gov

� New York City – Silicon Alley, Cornell Technion/Google Expansion in West side of Manhattan/Midtown East expansion/Tech and life science hub Brooklyn

� Upstate – Capitol Region – Albany – Collaboration

� Western New York – More than a frontier, but a growing Start-Up ecosystem near Niagara Falls and Canadian tech hub

� 43North – World’s largest business plan competition in America’s most affordable City (Buffalo)

Market Potential and Trajectory

� Entrepreneurs from Israel set up between 600-700 new tech companies each year. Israel has 6,000 or so active start-ups, but companies each year. Israel has 6,000 or so active start-ups, but only 1,000 of those successfully raise venture capital locally, according to IVC Research Center. Some of those have unique IP.

� Many Israeli companies already in U.S. (Silicon Valley, Boston, NYC – estimated 200 Israeli tech start-ups are in NYC alone); 65 Israeli companies on NASDAQ.

� Attractiveness of New York State as Market Entry Point –diversity, size, types of markets, breadth of industries, etc.

� Typical Trajectory of Israeli company entering the U.S.

What An Israeli Company Needs to Enter U.S. Market

� Money – refer you to 43North and other investors

� Support – 43North accelerator program and other accelerators� Support – 43North accelerator program and other accelerators

� Access to U.S. Market – need for market penetration

– Requires commitment of executives and dealing with host of legal and business issues

Questions About Entering U.S. Market

� If you are an Israeli founder thinking about a move to a larger market, how do you enter the U.S. market? What is your market, how do you enter the U.S. market? What is your roadmap?

� How do you establish and capitalize a subsidiary or other U.S.-based entity?

� What key legal and business issues do you have to worry about as you leap into the U.S. market (corporate structure, tax, finance, operations, marketing, employee/HR issues, intellectual property protection, immigration)?

� What are the rules of the road that you must think about?

Formation & Tax Planning

� Delaware “C” Corporation with authority to do business in New York StateNew York State

� C Corp as preferred vehicle for Israeli subsidiary in U.S. and for venture capital financing from U.S.-based funds

� Limited Liability Company

– Advantages and disadvantages

� U.S. tax issues vs. Israeli tax issues

Tax Treaty and IP Issues

� U.S.-Israel Tax Treaty

� Intellectual Property Location, Transfer and Sale Issues

Venture Capital Financing Features of Preferred Stock

� % “Interest” on Investment

� Liquidation Preference� Liquidation Preference

� Participating Preferred vs. Convertible Preferred

� Anti-Dilution Protection Formulas

� Dividend Rights (simple vs. cumulative/accruing)

� Conversion Rights

� Special Voting Rights

� Redemption Rights

What’s Left for Founders and Employees?

� Sweat equity gets common stock.

� Capital gets rights, preferences, privileges and protections of � Capital gets rights, preferences, privileges and protections of preferred.

� Founders and employees get potential for upside and incentive to drive up enterprise value.

Employees in the U.S.

� Will have to deal with a host of applicable U.S. federal, state and local laws and regulations. local laws and regulations.

� Ensure proper employment agreements with confidentiality and IP assignment agreements in place

� Document employee grants to avoid diligence problems down the road

� Employees vs. Independent Contractors: Your company does not want to be in a situation where your independent contractor is later found to be an “employee” for federal and/or state law purposes, so avoid penalties.

Equity Incentives

� Stock Options

� Restricted Stock � Restricted Stock

� Vesting

� Change of Control

� Employer Protections

– Limited window to exercise stock options, repurchase rights, rights of first refusal, drag along

� 83(b) Issues

Space and Real Estate Leases/Equipment Leases

� Accelerator Programs

� Real Estate Leases� Real Estate Leases

– Written lease

– Dealing with landlords

– Limits of use of property

– What happens in a change of control?

� Equipment Leases

Intellectual Property Protection in the U.S.

� Investors, acquirers and commercial partners will perform due diligence of your company’s intellectual property protection in the U.S. the U.S.

– Does the Israeli company really own the IP? Can third parties step in and claim ownership?

� IP Assignment Agreements – differences when involving individual, previous employer, university, government

� Patents

� Trade Secret – what is protectable?

� Trademarks and Service Marks

� Copyrights

Data Security and Privacy – the U.S. Legal Framework

� U.S. federal privacy laws

� HIPAA for health information� HIPAA for health information

� Gramm-Leach-Bliley Act (GLBA) for financial activities

� Children’s Online Privacy Protection Act (COPPA) and FTC guidelines

� State privacy laws

� Data security requirements

� Privacy policies

Other Issues

� Customs

� Commercial law issues – unique contractual issues� Commercial law issues – unique contractual issues

� Distribution agreements

� Joint ventures

� Sales representative laws in various states, and payment of commission

� Additional securities law issues as company grows

� Antitrust issues (for larger companies)

Immigration Status While in U.S.

� F-1 Immigrant Student Entrepreneur

� L-1 Visa for Intra Company Transferees � L-1 Visa for Intra Company Transferees

� L-1 New Office

� E-2 Treaty Investor

� H1-B Specialty Occupation

� EB-5 Immigrant Investor

For Further Information, Contact:

Asaf Hahami, Esq.

Phillips Lytle LLPPhillips Lytle LLP

The New York Times Building

620 Eighth Avenue, 23rd Floor

New York, NY 10018-1405

Email: ahahami@phillipslytle.com

Office: (212) 508-0432

Mobile: (917) 648-5060