The Startup Law of the Startup Nation


Israel is known as the “start-up nation”. Israeli start-ups raise billions of dollars in venture capital each year and form the lifeblood of Israel’s high-tech economy. However, the ever-growing importance of start-ups in the global and Israeli economies still awaits appropriate academic attention. In Israel, as elsewhere, the corporate law literature focuses almost exclusively on public companies. This article takes a first step towards addressing this omission. The article (1) discusses the unique characteristics of venture capital-backed companies as organizations that enable collaboration between venture capitalists and human capital providers; (2) explains how these characteristics are reflected in the corporate governance of start-ups; and (3) illustrates the argument by commentating on decisions by Israeli courts concerning start-up shareholder disputes. The article presents two main contributions. First, it argues that start-ups do not fit either the classic principal-agent theory of corporate law or the team production theory of corporate law as sole explanations. Instead, it proposes a synthesis of these two dominant models of corporate governance, namely “team production by joint ownership”. Several implications of the theory are discussed, including the content of fiduciary duties and corporate purpose. I also argue that this refined view of start-up governance explains the Delaware courts’ approach to corporate governance of start-ups more eloquently than other theories. Second, the article illustrates that Israeli courts tend to apply assumptions and precedents that arise from mature companies to start-ups without discussing the need to distinguish the circumstances. Consequently, there are discrepancies between common norms and culture in venture capital-backed companies and the development of Israeli case law. The article warns that if this trend continues, it may cause a rift between law in books and law in action with regard to start-ups and venture capital. The article concludes with recommendations for improving the situation, including the use of court-appointed experts with specific expertise in venture capital finance and strengthening legal education in start-up law.

Mishpatim, the Hebrew University Law Review