Employees of the D-ID startup company work at the company’s office in Tel Aviv, Israel on February 7, 2018. Photo: REUTERS/Amir Cohen.

CTech – The number of Israeli startups choosing to incorporate outside the country went up 10% in 2019, according to a recent report by IBI Capital subsidiary S-Cube Financial Consulting and Israel-based law firm Meitar Liquornik Geva Leshem Tal. According to the data, almost a fifth of Israeli startups, 18%, chose to incorporate abroad, mostly in the US.

The main reason those companies choose to incorporate outside Israel, according to the report, is that US venture capital funds and other US investors find it easier to invest in companies registered in-country.

Another reason might be that US startups receive much higher valuations compared to Israeli ones, according to Gideon Shalom Bendor, the founder and CEO of S-Cube, which specializes in startup valuations. After analyzing hundreds of deals, he found that an Israeli startup valued at $55 million during a funding round would have received a valuation of approximately $185 million had it been an American company, Shalom Bendor told Calcalist. He explained that what defines a startup as an Israeli one in the eyes of investors is the identity of the founders, the location of its research and development operations, and also its ecosystem — meaning where its legal representation and accountants are located.

The research, which relies on a company database that was not disclosed, looked at deals from the past six years, breaking them down according to rounds. During A rounds, Shalom Bendor said, a US startup receives on average a valuation 77% higher than an Israeli startup that is identical on all other matrices. That gap widens to 137% in B rounds, and by the C round, an American startup’s value is threefold the value of a similar Israeli one.

The consequences of these lower valuations are twofold. First, to raise the same amount as an American company, the founders of Israeli companies would have to part with a much larger stake. But on the other hand, these lower valuations increase the attractiveness of Israeli startups to US funds.

The findings of the report do not apply to Israeli companies that have reached unicorn status.

The choice to incorporate outside of Israel has a much greater impact if a company’s intellectual property is registered outside the country as well, as their taxation is determined also by IP. It is for that reason that Google and Apple register their IP in taxation-friendly countries like Ireland, thereby managing to avoid paying almost any direct tax on their Israeli research and development centers, excepting employment taxes. According to Meitar, incorporation outside of Israel does not necessarily mean its IP will also be registered outside the country.