The current environment in the global high-tech industry, particularly in Israel, is challenging. Many startups are struggling to raise their desired amount of funding, and some are even facing difficulties raising any funds at all. Despite the challenges of wartime, Israel's high-tech market is showing definite signs of renewed stability and investor confidence.
A question on every founder’s mind is: When will the M&A market return to its previous level of activity? While no one knows for sure, there are steps you can take today to maximize your chances of success when buyers come knocking. As a lawyer who has overseen dozens of deals, I offer a few considerations from a buyer’s point of view.
Israeli Innovation Authority
Some entrepreneurs seek funding from the Israeli Innovation Authority (IIA), usually during the early stages of the company's life. This is a great way to receive funding without dilution, and it helps entrepreneurs significantly. However, entrepreneurs should know that one of the IIA's demands for funding is that the technology produced from R&D supported by the IIA must remain in Israel. Consequently, when a company wants to acquire a startup and move its R&D center and IP to the US or elsewhere, it must pay the IIA an exit fine. These penalties can reach substantial sums and have even killed planned acquisitions that suddenly became too expensive for the buyer.
Be careful of promises
Promises can backfire. For example, in a case we worked on, a young startup promised one of its employees that, in addition to a base salary, he would receive 10% of the total acquisition amount if the company were acquired. This guarantee almost caused the whole deal to fall apart and required a lot of extra work to find a solution that satisfied all parties involved.
Creative tax structures
Young startups consult tax experts to improve their tax plans. While this is important, it’s crucial to remember that some tax decisions that seem brilliant at the time may jeopardize a future deal. For example, a target company one client was interested in acquiring took an aggressive and creative stance on tax withholding matters, forcing the buyer to take corrective action, and ultimately costing a lot of money.
Timeline
Although it may seem like a quick process to an outsider, a sale process takes time-an average of at least four months from the beginning of marketing the company, negotiating with suitors, to the final signing and closing. Large corporations also have internal processes that take time, with numerous departments working in parallel and scrutinizing the deal. Try not to rush the process; communicate openly and respect the other party's timing requirements.
Exclusivity
A point that many entrepreneurs are not familiar with is the issue of exclusivity. Typically, when the acquirer signs a non-binding term sheet, they request that the target company should sign an exclusivity clause, which states that the company cannot negotiate with any other buyer for a specified period. It is crucial to ensure that this clause remains within the norm, usually between 35-45 days, and to be careful not to inadvertently agree to longer periods, such as 90 days.
One possible solution is to find a middle ground, with extensions based on the progress of the deal, so that you are not locked in longer than necessary. The stage at which the exclusivity period ends is a significant milestone in the negotiation process; by then, the acquirer has already invested considerable resources in the process and will be concerned that you might return to the market to find another buyer, which could serve as leverage for the acquired company.
Insurance
Until not very long ago, the buy-side usually demanded that the acquired company should leave a percentage (often 10%) of the proceeds received in escrow, just in case something came up in the future that breached the terms of the acquisition and caused damage to the buyer. Today, it is common to buy an insurance policy for the deal at a relatively modest cost, allowing acquirees to benefit from the entire amount paid as part of the acquisition, while the buyer is covered in case of future surprises.
Running a startup is a challenging endeavor that demands constant decision-making, rapid adaptation, and a relentless focus on growth. The fast-paced nature of startups often means that founders and their teams need to respond to immediate needs and opportunities. It is crucial to periodically pause and reflect on whether your short-term decisions align with your long-term goals. Taking the time to evaluate your strategic direction ensures that you are not just reacting to immediate pressures but are also building a sustainable foundation for future success.
This reflection can help identify potential misalignments and allow you to course-correct before small issues become significant problems. Ultimately, the ability to navigate the present while keeping an eye on the future is what distinguishes successful startups from those that falter.
The author is the managing partner at Greenberg Traurig Tel Aviv.
Published by Globes, Israel business news - en.globes.co.il - on June 26, 2025.
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