Daniel’s practice focuses on representing publicly traded companies in Israel and abroad, as well as emerging and established companies across a broad spectrum of industries, with an emphasis on private finance, mergers and acquisitions, corporate partnerships, strategic investors and joint ventures from first seed financing through acquisition.
Daniel’s experience includes advising high-tech and start-up companies in various fields, including intellectual property, commercial law, corporate law and privacy law.
Daniel heads the firm’s Employee Benefits and Executive Compensation group. Daniel has extensive experience in representing and advising the firm’s clients, including Israeli and multinational publicly listed companies, start-ups and privately held companies, investment funds, financial institutions, executives and senior management regarding all aspects of designing, implementing and managing equity based compensation plans and benefits.
In addition, Daniel also advises Israeli and foreign companies in relation to various regulatory issues, including antitrust, R&D and innovation funding from the Office of Chief Scientist and defense export control.
Prior to joining Barnea & Co., Daniel practiced law for several years in the international department of a leading Israeli firm.
The Interdisciplinary Center Herzliya (LL.B, B.A Business Administration), 2009
Member of Israel Bar Association since 2010
News and updates - Daniel Lorber:
Carve-out Plans for Company Employees
One of the common remuneration mechanisms in startups and technology companies is the granting of options to employees in addition to or, sometimes, in lieu of, the traditional remuneration component – the cash salary.
The practical meaning of granting options is that employees are granted a right to purchase shares of the company at a fixed price at some time in the future.
Options enable startups to compensate for their inability to offer attractive salaries and recruit a top-tier workforce (due to the lack of available funds in the initial stages of a start-up’s lifecycle) and, at the same time, the grant of options serves as an effective tool to align the interests of the employees with those of the company.
Recently, we have been seeing an increasing number of cases in which successful startups that succeeded in securing investments from more than one investor in at least two investment rounds, find themselves in a complicated situation, whereby the company’s capitalization table following the above investment rounds does not enable the company to effectively incentivize its employees.
How does this situation occur?
When a company raises capital from strategic investors (for the most part, venture capital funds), it grants preferred stock to those investors against their investment. One of the key rights attached to preferred stock is the right to receive a certain portion of any future proceeds distributed upon the sale of the company, prior to the remaining shareholders (liquidation preference rights).
Since every strategic investor seeks to ensure a pre-determined return on investment, a company with several strategic investors may find itself in a situation whereby, upon the occurrence of a sale event, the distribution waterfall of the proceeds dries up before it reaches the company’s ordinary shareholders, which, ordinarily, are comprised of the company’s founders and employees.
This situation poses a major challenge to the company to retain and recruit the “best and brightest” employees, especially since in this era employees in the field of high-tech are well informed regarding equity incentive mechanisms and they are looking to join a company that offers a substantive equity incentive – and not just one on paper.
This situation is also disturbing for the company’s current and potential investors, as every investor appreciates that the best way to guarantee that its investment will eventually reap profits is to ensure that the company’s employees are fully committed to the company’s success.
In order to create that incentive for the company’s employees, companies facing the above predicament may amend their equity incentive plan and adopt what is known as a carve-out plan. A carve-out plan essentially “carves out” a fixed percentage of any future sale event and designates such percentage of the founders or employees of the company.
The adoption of a carve-out plan requires full coordination with the company’s current investors, since they are the ones who will be relinquishing a certain portion of the proceeds to which they are entitled, to the benefit of the founders or employees.
The adoption of a carve-out plan also raises significant legal considerations, such as the need to amend the company’s existing articles of association in order to create a new class of shares which is specifically designed to provide the grantees under the carve-out plan with the exact rights which are required to implement the plan, without disturbing the existing relationships between the company’s shareholders. Additionally, the adoption and implementation of a carve-out plan raises issues in the field of taxation, due to the need to seek the Israeli Tax Authority’s prior approval to the carve-out plan before it can be implemented.
How can companies avoid this situation?
Founders of startups need to devote considerable thought and planning prior to raising investments regarding exactly how much funds they require for the purpose of carrying out their business plan, and at what company valuation.
Often, accepting a lower investment amount than the amount that the company could raise in a particular investment round, or holding off on raising capital until the company reaches a more mature stage, thus enabling the company to raise capital at a higher valuation, will minimize the dilution of the ordinary shareholders of the company.
Of course, it is far easier to write about refusing available funds than actually turning such funds down in reality. However, adopting this kind of long-term thinking on the part of the founders of startups, and taking the issue of incentivizing employees as a dominant consideration from the company’s inception, may assist in avoiding having to face a problematic ownership structure which ultimately requires adopting a carve-out plan.
Effective NDA’s Protect Startups and Investors
Investors in startup companies need to learn as much about those companies as possible to make an informed decision. You do not want to go in blind before you put money into a startup a company. Still, the company in which you seek to invest needs to protect its confidential and proprietary information; otherwise, it stands to lose the benefit of introducing an innovative solution to the market. In order to put both sides at ease at the initial stages of the engagement, investors and startups generally turn to non-disclosure agreements (NDA’s). These agreements are designed to protect confidential information, while providing investors the information they need in order to make a determination whether to invest in a given startup.
As with any contract, an NDA must define who the parties are. An investor may have interests in related companies and the agreement will spell out whether any information can be shared within a larger network, specific entities, or just specific individuals employed by the investor or acting as the investor’s consultants. It is important to define the party receiving the confidential information in a way which provides the startup comfort that any confidential information revealed to the investor will not end up in the hands of a potential competitor, as well as limiting the investor’s exposure by spelling out clearly to whom the confidential information may or may not be disclosed.
Defining Confidential Information
The parties must also carefully define what confidential information is protected under the NDA. For startups, this can provide particular challenges; products and services may be developed over the course of the term of the NDA. The definition of confidential information must be broad enough to cover variations and emerging confidential information, while still maintaining a definition which is focused on the concrete engagement between the parties. Both parties benefit from clarity here; too broad a definition of confidential information can potentially expose the investor, while a narrow definition can leave the startup unprotected.
The NDA should also set certain exclusions to protected confidential information in order to limit the investor’s obligation to safeguard certain information which may already be in its possession or which may become insignificant to the startup in the future. Typical exclusions will include public information or any information which the investor already knows at the time of disclosure. In the high-tech industry this exclusion is of specific importance as sophisticated investors often have a detailed understanding of a startup's industry and will not want to be penalized for any pre-existing knowledge. On the other hand, startups need to make sure that the exclusions are not drafted too broadly as to negate their confidential information.
The rest of the agreement will include terms for both sides to follow: how information is to be protected, permissible use of the information, the parties’ duties after the agreement expires and what actions the disclosing party may take in the event it reasonably believes its confidential information has been jeopardized. The two sides have diverging interests, so negotiating terms fair to both sides helps create conditions that allow the sides to work together.
Creating well drafted, effective NDA’s allows startups and investors to start working together towards a future investment. Contact Barnea & Co.’s experienced team to help you start your relationship on the right foot.
Crowdfunding: Funding Companies in the Startup Nation
For many small businesses around the world, crowdfunding - the pooling of usually small investments from a large group of investors - facilitates the ability to start a business without large institutional investments in the company. The portfolio of crowdfunding investors is diverse and is comprised of a broad array of ROIs (returns on investment). Investors may be donating to a specific cause, seeking repayment with interest or claiming equity in the company.
In the past year, Israel has loosened some of its regulatory impediments which existed under the Israeli Securities Law and regulations in order to enable and promote crowdfunding as a viable investment alternative for startups and small businesses. Under the new regulatory regime, investors can now come together to help fund companies in the startup nation, without the offer by the company to potential investors being deemed an Initial Public Offering.
The Israeli Legal Update
Crowdfunding has long been difficult to do in Israel. Section 15 of the Israeli Securities Law required until recently that the Securities Authority approve a prospectus for any offer of shares to more than 35 investors. This process made investment onerous for startups unable to access funds from venture capital funds and large financial institutions.
In late 2015, Israel enacted its new Law for the Encouragement of Investment in High Tech Companies. This new law is actually an amendment to the Securities Law. It provides an exception for small investments, thus clearing the way for crowdfunding to occur without the prospectus requirement. It allows for tradeable venture capital funds to be created, which should further encourage group investments in new and emerging companies.
The law also encourages startups to remain in Israel by making local funds more available; companies that may otherwise have sold or moved to more funding-friendly locations now have fewer incentives to leave.
Crowdfunding Boosts in Israel
As with any financing structure, investors and companies who wish to invest or raise funds through crowdfunding need to take the time to understand the legal and commercial implications of this financing tool before diving in. Crowdfunding in Israel still requires at least one accredited investor to participate in a fund. The idea of a completely deregulated funding scheme has not yet taken hold. Furthermore, investors need to remember that, in a crowdfunding scenario, they may have limited rights compared to other investment routes.
Since the latest regulatory changes, a significant increase in crowdfunding investments has already taken place.
In 2014, the aggregate investments through crowdfunding worldwide amounted to USD 10 billion. This number grew by 350% in 2015 and reached a staggering USD 35 billion.
We have seen a dramatic increase in Israel as well during this period and expect to see these numbers increase in Israel and worldwide as the regulatory barriers which currently exists are gradually lifted.
If you are interested in raising funds or investing through crowdfunding, you need to navigate a new legal structure that is still being defined. Contact Barnea & Co. for help in getting started.