Israel is known as “the start-up nation”(1), 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 has come up in the stories told of McDonald’s[2] and Facebook’s[3] 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 example rulings in Israel involve the bar chain Drink Point and the tourism enterprise Roomer. These rulings emphasize the significance of professionally and explicitly defining, in a contractually binding manner, the relationship between the founders at the beginning of their journey with the goal of preventing unnecessary disputes at later stages of the newly established enterprise.

In Drink Point,[4] 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. 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 under 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.

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 Roomer[5] 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 defined the shares in the company that will be established yet it was silent on the parties’ rights in the intellectual property assets. 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 he\she was entitled to only a portion of its shares.

This ruling demonstrates that the initial co-founders’ agreement should look at the 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.

 

Advocate & Partner Orit Gonen and Advocate Lior Glassman of Gilat, Bareket & Co. of Reinhold Cohn Group, specializing in counsel and legal services to start-ups in the Intellectual Property field.

[1] A name, for instance, Dan Senor and Saul Singer give to Israel in their book Start-Up Nation: The Story of Israel’s Economic Miracle.

[2] See The Founder which tells the story of Ray Kroc and the McDonald brothers.

[3] See The Social Network and the book it is based upon The Accidental Billionaires: The Founding of Facebook, a Tale of Sex, Money, Genius, and Betrayal.

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

[5] 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).