Publishing of mitigations in the “start-up companies” plan of the Israeli Chief Scientist

Publications of Mitigations in the "Start-Up Companies" Plan of the Israeli Chief Scientist/ Nili Shohet

For various reasons, starting R&D companies find it difficult to raise funds at the private sector. Therefore, the Israeli Chief Scientist issued this unique program that may grant an enterprise a grant of between 50% to 85% of its expenditures in its first two years, in order to give a positive signal to investors and to create an incentive to invest in Israeli R&D companies.

The attractiveness of the program can be seen from the high rate of companies that submitted an application within its framework. In the first year of the program (2013) 138 applications were submitted, 72 of which (52%) were approved.

The aggregate amount of applications submitted in 2013 was ILS 534 million and the total approved funding was ILS 156 million with an average approved budget per project of ILS 2.2 million.

In view of the success of the program among entrepreneurs, on July 19, 2015, the Israeli Chief Scientist published an update to the program and in fact added a number of mitigations for filing companies. Such mitigations include:

1. The complementary funding - need not be only an investment in return for shares, but may also be by a convertible loan.
2. The prerequisites for entering the program have been changed so that more companies will be able to access the program. For example: the age of the company was changed from three years to four years, the scope of the company's recruitment until delivery increased from ILS 3 million to 6 million, and more.

Here are the full details of the program "start-up companies," of the Israeli Chief Scientist

Regular Route Support Program:

This route includes a number of benefits that do not exist in other programs, namely:

1. Support of 50% of the approved budget of the R&D program (companies in locations defined as development areas are eligible for additional support).
2. Accepting the answer to the grant - in just two months.
3. The possibility to grant complementary funding provided by the state for up to six months after the approval of the R&D program.
4. The recognized expenses include payroll expenses (ILS 30,000 cost for employer), overhead (rent, property taxes, etc.), materials, equipment, subcontractors, patents and commercialization and marketing expenses, such as advertising, travel, participation in conferences, etc.
5. The amount of the grant budget may reach up to ILS 10 million spread over two years, depending on the budget that the company filed at the time of the application and progress in accordance with the development plan that was submitted.
6. The support is repaid only by payment of royalties if the company makes sales.
7. There is no need to issue the Chief Scientist shares in exchange for the support. In other words, developers and investors are not diluted.

What is defined as a Start-Up?

• Four years have not passed from the date of incorporation until date of application;
• The company's aggregate sales from the date of incorporation and the date of application does not exceed ILS 1,500,000 and no more than ILS 500,000 in the past 12 months;
• Total expenses of the corporation in the 12 months preceding the application, does not exceed ILS 2 million (ILS 4 million in biotechnology company);
• The aggregate funding, of any kind whatsoever, that the corporation raised as of the date of its incorporation does not exceed ILS 6 million (ILS 9 million for a company in biotechnology) and does not exceed ILS 3 million (ILS 4.5 million for a company in biotechnology) in the previous 12 months, including raising supplementary funding provided under the program update.
• "supplementary funding" – it is required to have an additional investment in exchange for shares or a loan convertible into shares (not by the State) complementing to 100% of the recognized expenditure approved by the Start-Ups Committee.Criteria for Filing for Support of the Israeli Chief Scientist
• The product must be innovative (a patent process may help to establish the product innovation).
• The product has a market. It is important to establish this by professional studies.
• The program and budget must be as detailed as possible, including hours and manpower costs for all stages of development, costs of subcontractors (preferably based on bids from subcontractors) and so on.
• One must present a business model and a detailed sales forecast for the next 5 years.
• One need present a detailed manufacturing and marketing plan.
• The corporation need be legally incorporated at the time of application.Special benefits for the Haredi Sector and the Minorities Sector:
• Prerequisites:

• Entrepreneur from the minorities or Haredi sector.
• The entrepreneur is employed full time.
• At least 33% of the share capital (on a fully diluted basis) is held by the entrepreneur.Terms of the program:
• Total government funding granted shall not exceed ILS 2 million or 85% of total recognized expenditure, the lower of which. At the end of the support period, one may request additional support as part of the normal route to the cumulative amount of government funding on both routes not exceeding ILS 5 million for a period of up to 24 months.