The Government Seed FundThe Government Seed Fund

February 2004February 2004

BackgroundBackground

The Burst of the high-tech Bubble + The Burst of the high-tech Bubble + Security Situation = Fewer Security Situation = Fewer Investments Particularly in Start-UpsInvestments Particularly in Start-Ups

The Need: Sharing Investor Risk to The Need: Sharing Investor Risk to Encourage Investments and Increase Encourage Investments and Increase the Number of Start-Up Companiesthe Number of Start-Up Companies

The seed programThe seed programAn additional and separate vehicle An additional and separate vehicle for a limited time period to support for a limited time period to support new start-up companies.new start-up companies. The Government’s matching The Government’s matching investment shares the risk with the investment shares the risk with the investor. investor. The investor also enjoys the The investor also enjoys the equivalent of a stock option at the equivalent of a stock option at the opening priceopening price

Seed Program (cont.)Seed Program (cont.)

Funding Source:Funding Source:

VC Fund or Corporation Active in VC VC Fund or Corporation Active in VC or Tech Company Investing in Like or Tech Company Investing in Like IndustriesIndustries

Has the ability and manpower to Has the ability and manpower to guide the management of the new guide the management of the new company company

Has sufficient available funds Has sufficient available funds

Seed Program(cont.)Seed Program(cont.)

Start-Up Company:Start-Up Company:

R&D Company in Existence for not R&D Company in Existence for not more than 6 Months more than 6 Months OROR Whose Total Whose Total Expenditures have not Exceeded Expenditures have not Exceeded 800,000 NIS.800,000 NIS.

First Round – excluding financing for First Round – excluding financing for feasibility study.feasibility study.

Investment ModelInvestment ModelEssentially Like VC Investment in the Essentially Like VC Investment in the Private Sector.Private Sector.

Ensure that Government and Investor Ensure that Government and Investor Interests Overlap.Interests Overlap.

Determine a System that will Yield a Determine a System that will Yield a Return to the Government for a Successful Return to the Government for a Successful Investment.Investment.

Ensure that the Government will be able to Ensure that the Government will be able to Sell its Holdings to a Third Party.Sell its Holdings to a Third Party.

The Government’s InvestmentThe Government’s Investment

Up to 5 Million NIS per Company per Up to 5 Million NIS per Company per 2 Year Period that will Finance up to 2 Year Period that will Finance up to 50% of the Approved Work Program.50% of the Approved Work Program.

The Expenditures Supported will be The Expenditures Supported will be Those Related to R&D.Those Related to R&D.

The Government’s InvestmentThe Government’s InvestmentThe seed fund and the investor will The seed fund and the investor will put up matching funds.put up matching funds.Preferred shares will be issued as Preferred shares will be issued as follows: follows: – Preferred shares ‘A’ – InvestorPreferred shares ‘A’ – Investor– Preferred shares ‘A1’ – Seed Fund Preferred shares ‘A1’ – Seed Fund

(nonvoting + no right to appoint (nonvoting + no right to appoint directors)directors)

– Ordinary shares – Entrepreneurs and Ordinary shares – Entrepreneurs and workersworkers

The Government’s The Government’s Investment(cont.)Investment(cont.)

Preferred Shares “A1”:Preferred Shares “A1”:

Liquidation Preference (incl. Merger, Liquidation Preference (incl. Merger, Purchase of Shares and Properties).Purchase of Shares and Properties).

Dividend PreferenceDividend Preference

Rights of Conversion to Preferred Rights of Conversion to Preferred Shares “A” or ordinary shares.Shares “A” or ordinary shares.

Full Ratchet Protection Against Full Ratchet Protection Against Dilution of Shares.Dilution of Shares.

The Investor’s OptionThe Investor’s Option

The Investor will be given an Option The Investor will be given an Option to Purchase the Government Shares to Purchase the Government Shares Anytime Within the First 5 Years.Anytime Within the First 5 Years.

Within the first 3 Years the purchase Within the first 3 Years the purchase is at cost plus “regular” interest.is at cost plus “regular” interest.

For Years 4 and 5 at cost plus For Years 4 and 5 at cost plus “higher” interest.“higher” interest.

PrivatizationPrivatization

The Sale of the Government’s The Sale of the Government’s Holdings in the Start-Up Companies Holdings in the Start-Up Companies does not Entitle any of the investors does not Entitle any of the investors the right of first refusal if a 60 days the right of first refusal if a 60 days notice of sale was given and the notice of sale was given and the investors did not express interest in investors did not express interest in purchasing the seed fund sharespurchasing the seed fund shares

R&D LawR&D Law

With reference to transfer of know-With reference to transfer of know-how and manufacturing rights, the how and manufacturing rights, the company will be bound, as are all company will be bound, as are all those enjoying government support those enjoying government support by by R&D LAWR&D LAW

The approval procedureThe approval procedure

The Investor – can apply to be The Investor – can apply to be approved even without a specific approved even without a specific company he wants to invest in.company he wants to invest in.

The Company - can’t get approval The Company - can’t get approval without an approved investor without an approved investor investing in it. investing in it.

Board MembersBoard MembersThe seed fund has an exclusive steering committee:The seed fund has an exclusive steering committee:

Mr. Eli Opper – Chief Scientist, MOITaLMr. Eli Opper – Chief Scientist, MOITaLMr. Yaacov Perry- Chairman of the Board of Mr. Yaacov Perry- Chairman of the Board of Directors United Mizrahi BankDirectors United Mizrahi BankMr. Chemi Peres- Managing Director, PitangoMr. Chemi Peres- Managing Director, PitangoMs. Rakefet Russak- Bank LeumiMs. Rakefet Russak- Bank LeumiMr. Ron Eylon-CFO Mirs communicationMr. Ron Eylon-CFO Mirs communicationMr. Shlomo Shalev- Senior VP investments AmpalMr. Shlomo Shalev- Senior VP investments AmpalMr. Rafi Nevo-CEO TreatecMr. Rafi Nevo-CEO TreatecMr. Yoav Forer- VP YEDA SolutionsMr. Yoav Forer- VP YEDA Solutions

FOR FURTHER INFORMATIONFOR FURTHER INFORMATION

Please contact Please contact

Mr. Itamar Dar Mr. Itamar Dar

Seed Fund managerSeed Fund manager

Email: Email: itamar@ocs.moit.gov.ilitamar@ocs.moit.gov.il

Tel: 02-6662457Tel: 02-6662457

Web: www.moit.gov.il/heznek.htmWeb: www.moit.gov.il/heznek.htm