Get-rich-quick Exits Depress Tech Sector's Growth - Treasury

Committee suggests tax breaks to boost technology firms, startups

The tendency of Israeli entrepreneurs to sell their startups early is bad for the Israeli technology sector, and the Finance Ministry hopes to root it out through tax incentives. Local companies aren't given a chance to grow into true multinationals: Instead, their founders sell them to other companies, cashing out early.

The High-Tech Committee, headed by Finance Ministry Director General Haim Shani, suggests encouraging Israeli technology companies to grow (rather than be sold early ) by giving tax breaks on the late sale of shares.

Shari noted that the number of "big technology companies" in Israel has remained stagnant for 15 years. The upshot is great loss of value to the economy as a whole from the early sale of Israeli technology companies, says Shani, who had been wooed over to the Finance Ministry from the successful technology company NICE Systems.

A "personal incentive" suggested for company founders, to hold on to the companies until they are mature enough to be floated on a stock exchange, is a tax break on their capital gains after flotation. One mechanism to assure that companies aren't sold too early is to reward their founders with tax incentives (a break on capital gains tax ) only if they hold onto their shares for a minimal number of years. Alternatively, the tax break could grow with the length of time the entrepreneurs hold onto their shares.

The committee presented its recommendations yesterday to a host of government officials with a say in economic policy, including Finance Minister Yuval Steinitz; Industry, Trade and Labor Minister Benjamin Ben-Eliezer; Eugene Kandel, head of the National Economic Council; his predecessor, Manuel Trajtenberg; and Industry, Trade and Labor Ministry Director General Sharon Kedmi.

Another aspect the High-Tech Committee is addressing is how to encourage institutional investors to invest in technology companies. One suggestion under consideration is to induce institutionals to place up to 0.4% of their funds under management in high-tech companies, including through venture capital funds, which typically invest in young companies.

The state might give the institutionals a safety net that restricts their potential loss. Alternatively, the institutionals might be permitted to keep the investment out of their profit & loss reports for a few years.

The committee also gave its attention to the special problem of "seed companies," which are fledgling firms, sometimes barely beyond the stage of an "idea in a briefcase." In 2009, seed companies in Israel raised just NIS 39 million, a drop of 56% from the year before.

The committee's solution to help seed companies is to recognize investors' investments for tax purposes, Shani explains. To give a boost to corporate research and development, the committee suggests making the tax break contingent on 75% of the investment being used for R&D. The recognizable investment in each company would be capped at NIS 5 million, the committee suggests.