Israel: This Is Not The Way To Launch A Start-Up!

Israel is known as "the start-up nation" and so Israelis are 'start-up people'. They are entrepreneurs at heart, thinkers, researchers and developers, fundraisers, advertisers, marketers and salespersons. These qualities and talents needed to ensure success are not usually found in one person alone; indeed, behind every success story we usually find a group of founders. Whatever the roles and responsibilities laid out among them may be, Israeli court rulings have emphasized the importance of founders' agreements serving the future of any venture's fate.

The importance of decisions made by founders before launching a new venture have come up in the stories told of McDonald's and Facebook's early days. However, this importance does not just concern billion-dollar companies that have been the subject of Hollywood films; it also concerns any venture before its launch, whatever its value.

Two rulings were recently handed down in Israel emphasizing the significance of defining the relationship between the founders at the beginning of their journey and in a professional manner, with the goal of preventing unnecessary disputes at later stages of the newly established enterprise.

In one case¹, the court denied the attempt of two out of three entrepreneurs to prevent the third partner from making use of the products of the short-lived venture between them. After concluding that the relationship between the parties, which lasted for about a year, was aimed at evaluating the implementation of a business that ultimately did not materialize, the court held that in the absence of an agreement stating otherwise, any one of the three is entitled to make use of the products pursuant to their rights by law. Thus it was held that the idea of establishing a network of bars has no merit for protection according to the law and any one of the three is entitled to found a bar chain. It was further held that it was actually the defendant who came up with the name Drink Point and even purchased the domain name drinkpoint.co.il, among other things.

This ruling demonstrates the importance of reaching an acceptable contractually binding agreement at the initial stage of any joint venture, setting the roles and responsibilities of each of the co-founders as well as their rights should their venture fail.

In another case², the rights of a founder who had left a tripartite venture in the framework of an entrepreneurship program were discussed. The agreement between the parties granted each founder who completes the year-long entrepreneurship program the right to receive an equal share in the company realized from the enterprise yet it was silent on the parties' rights in the intellectual property assets deriving from the project. The court enforced the agreement's provisions and held that according to its terms the departing partner is entitled to a portion of the company's shares. As to the claim to rights in a portion of the company's intellectual property, it was held that since the agreement did not relate to the parties' intellectual property rights after the establishment of a company, it is necessary for the court to fill in this gap. The court held, given that intellectual property is the main asset of a startup from which its value is derived, that it is reasonable to assume that had the parties related in the agreement to the intellectual property at a stage after the company's establishment, they would have assigned all of it to the company. The impact of this deliberation is that the departing entrepreneur has no rights in the company's intellectual property, yet is entitled to only a portion of its shares.

This ruling demonstrates that the initial co-founders' agreement should look at present and future aspects of the relationship between the parties, and regulate in advance their rights and obligations both for a scenario where they establish a company and pursue business together, and for one where they split up.

As such, it is of crucial importance for entrepreneurs to prescribe their rights to the intellectual property of the enterprise or company prior to its launch (patents, trademarks, designs, trade secrets and so on)!

It is therefore recommended to seek legal advice from an experienced counsel with expertise in the start-ups (especially know-how and technology-intensive ones) and intellectual property, from the earliest stage of any such challenging journey.

This article was first published on the People & Computers website.

Footnotes

[1] CF 16803-04-13 Nakdai et al. v. Oz et al. (18 December 2016).

[2] OM 26834-07-14 Ben David et al. v. Nevo and OM 46897-12-14 Nevo v. Roomer Travel Ltd. et al. (2 January 2017).

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