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Best Practices for LPs Negotiating with Israeli VC Funds


Introduction: Limited Partners (LPs) considering an investment in an Israeli venture capital fund should approach negotiations armed with an understanding of both standard venture fund terms and the nuances of the Israeli market. Israeli VC funds are typically structured as limited partnerships much like U.S. fundsbarlaw.co.il, and they generally follow global norms on key terms such as “2 and 20” (2% annual management fee and 20% carried interest). However, there are specific legal, regulatory, and cultural considerations in Israel that may affect fund terms and LP rights. In what follows, we outline what LPs should look for in term sheets, side letters, fund structure, and governance provisions when evaluating Israeli VC funds, and compare these practices to standard U.S. and European norms.

Term Sheets and Key Economic Terms

Term sheets for a venture fund investment summarize the fundamental economic terms that will later be detailed in the Limited Partnership Agreement (LPA). LPs should scrutinize these terms to ensure they align with market standards and properly incentivize the General Partner (GP). Key economic terms include:

  • Management Fees: The management fee is the annual fee paid to the GP to cover operating costs (salaries, due diligence, administration, etc.). Israeli VC funds typically charge around 2% of committed capital during the investment period, similar to U.S. fundsangellist.com. Smaller funds may charge slightly higher (e.g. 2.5%) to sustain operations, whereas larger funds or follow-on funds might step down fees over timeangellist.com. It’s important that the fee structure is reasonable and not excessive, as high fees can misalign GP incentives. ILPA guidelines encourage GPs to justify the fee with a budget and to reduce fees after the investment period or if the fund is extendedilpa.orgilpa.org. LPs can negotiate for step-downs (e.g. reducing the fee to 1.5% or to a percentage of invested capital after the initial 5-year investment period) and caps on total fees. In comparison, European VC/PE funds often have similar fee levels, though some EU funds, especially larger or later-stage funds, might start around 1.5–2% and base fees on invested capital after the investment period. The bottom line for LPs: ensure the management fee is in line with industry norms and reflects the fund’s size and strategy – it should cover expenses but not enrich the GP absent performanceangellist.com.

  • Carried Interest (Carry): Carried interest is the GP’s performance incentive – a share of the fund’s profits (typically 20% of profits is standard globally, including in Israelangellist.com). The term sheet should clarify the carry percentage and the waterfall structure: i.e. how distributions are split between LPs and GP. Most Israeli venture funds follow the classic model where LPs receive 100% of distributions until they recover their contributed capital (and any preferred return, if applicable), then the GP receives carry (often with a catch-up) so that profits are ultimately split 80/20 (assuming a 20% carry)angellist.com. Notably, pure venture funds often do not have a preferred return/hurdle rate, unlike many European private equity funds that commonly include an 8% preferred return for LPs before carry kicks in. Israeli practice here mirrors U.S. venture practice – carry is usually 20% with no hurdle, though if the fund’s strategy is more growth-equity or private-equity-like, LPs might negotiate a hurdle. Another point to watch is whether carry is calculated on a deal-by-deal basis or whole-fund basis. U.S. funds sometimes allow deal-by-deal carry (American waterfall), meaning the GP can start taking carry on profitable exits before the fund as a whole is fully returned; European funds more often use a whole-fund (European) waterfall (GP gets carry only after the entire fund’s capital and any pref are returned to LPs). LPs generally prefer the whole-fund model for alignment. If an Israeli fund proposes deal-by-deal carry, LPs should insist on robust clawback provisions to recoup carry if later losses cause the GP to have been overpaidangellist.com. Ensure the term sheet spells out how clawbacks work and that GPs are personally liable (jointly and severally) for returning excess carry if needed. In summary, LPs should look for a 20% carry with protections equivalent to global standards – any deviations (like higher carry or deal-by-deal distributions) warrant careful negotiation or trade-offs elsewhere.

  • GP Commitment (“Skin in the Game”): The GP’s own capital commitment to the fund (expressed as a percentage of the total fund) is a key alignment mechanism. Industry best practice (endorsed by ILPA) is that GPs contribute a meaningful amount of their own money (often 1–3% of the fund in cash) to ensure they have skin in the gameangellist.com. LPs should confirm the GP commitment in the term sheet and whether it’s being funded in cash up front or, less ideally, via management fee waivers. Israeli VC funds generally follow the same expectations as U.S./Europe in this regard – around 1% or more from the GP team is common. If the Israeli fund’s principals lack liquidity, they might seek to fund their commitment by waiving management fees or via a loan; LPs should be cautious with such arrangements since ILPA guidelines prefer the GP commit be in cash (demonstrating real risk alongside LPs)angellist.com. A higher GP commit (say 2–5%) may be a positive sign of GP conviction (especially if the GP team has substantial personal wealth), whereas an unusually low commit may merit discussion. Compare this to Europe, where historically some government-backed VC funds had lower GP commits, though today ~2% is standard, or to U.S. funds where 1–2% is the norm (potentially higher for debut funds to signal confidence). Insist that the GP commitment is locked in and not allowed to be reduced.

  • Other Economic Terms: A term sheet may also outline the fund’s term (duration), typically 10 years with up to 2-3 one-year extensions with LP advisory committee consent – Israeli funds are no different, though some Israeli VC funds have needed extensions if exits take longer (in fact, many Israeli funds now assume investment periods of 5 years and total fund life of 10-12 years, in line with global trends). Ensure the term and any extension conditions are clear. Also check for management fee offsets or rebates (for example, 100% offset of any transaction fees or director fees the GP receives – ILPA recommends that any such fees be rebated to the fund or LPs). Finally, recycling provisions (the GP’s ability to reinvest distributions) should have a reasonable cap. These details might not all appear in a high-level term sheet but will be in the LPA – however, an LP can ask for clarification early. The goal is to verify that all economic terms add up to a fair alignment of incentives: the GP earns money primarily by generating returns (carry) rather than by fees, and the LPs get the benefit of the bargain in strong returns net of a reasonable cost structure.

Fund Structure and Legal Framework in Israel

Understanding the legal structure of an Israeli VC fund is critical, as it affects governance and certain default rights. Most Israeli venture funds are organized as limited partnerships under the Israeli Partnerships Ordinance (1975)barlaw.co.il. In this structure, the fund manager (or a management company it sets up) serves as the General Partner (GP), bearing unlimited liability and control, while the investors come in as Limited Partners (LPs) who have limited liability and do not partake in day-to-day management. This GP/LP model is essentially the same as in the U.S. or Europe and provides pass-through tax treatment. However, when negotiating with an Israeli fund, LPs should consider a few Israel-specific structural and legal points:

  • Regulatory Environment: Unlike Europe where fund managers often must comply with regulations like AIFMD, Israeli VC funds do not require a specific fund management license or registration. There is no heavy regulatory regime for private VC/PE funds in Israel – they operate under general securities law private placement ruleslexology.com. This means the onus is on the LPA and contracts to govern the relationship, as there isn’t a government regulator reviewing fund terms. For LPs, this lack of regulation is similar to the U.S. in spirit (where most VC fund terms are contract-driven and not SEC-mandated, as long as managers are below certain size thresholds), but different from, say, an EU fund where an AIFMD-authorized manager has disclosure and custody rules. Practical tip: because of this, ensure the LPA has robust provisions – you cannot assume any statutory protections beyond basic contract law and the Partnerships Ordinance.

  • Private Placement Rules: If you are one of a few smaller LPs or an LP that is not a “Qualified Investor” under Israeli law, be aware of the 35 offeree rule. Israeli securities law limits the offering of fund interests to no more than 35 non-qualified investors in any 12-month periodlexology.com. In practice, most institutional LPs will meet the “Qualified Investor” criteria (similar to being an accredited/sophisticated investor) and thus don’t count toward that 35 caplexology.com. But this rule essentially mirrors private placement regimes elsewhere (e.g., U.S. Regulation D’s 35 non-accredited limit). As an LP, you mainly just want to ensure the fund is complying – the GP may ask you to certify your investor status. If a fund were to accidentally solicit too broadly and breach this rule, it could cause legal complications. Sophisticated Israeli GPs are well aware of these limits.

  • Governing Law and Dispute Resolution: Many Israeli funds use Israeli law as the governing law in the LPA (and often the partnership itself is domiciled in Israel). This is generally fine – Israeli contract law upholds LPA provisions – but foreign LPs might negotiate for certain dispute resolutions like international arbitration. Occasionally, an Israeli fund targeting international LPs might set up a parallel fund entity in a familiar jurisdiction (Delaware or Cayman) to accommodate investors’ preferences (for tax or legal comfort). It’s worth asking the GP about the fund structure: Is there an offshore feeder or parallel fund for foreigners? Are all LPs in one Israeli partnership? If you are investing through a non-Israeli vehicle, confirm that economic and governance rights are equivalent across parallel structures.

  • Default Legal Provisions: One quirk to note is that Israel’s Partnerships Ordinance contains “dispositive” default provisions that apply to limited partnerships unless the LPA says otherwisebarlaw.co.ilbarlaw.co.il. LPs should be sure the LPA explicitly overrides any default rules that are undesirable. For example, by default, Israeli law would allow the GP to add new limited partners without existing LP approvalbarlaw.co.il. Most LPAs will override this by requiring LP or advisory board consent for admitting new investors after final closing, but it’s worth verifying. Another default is that a limited partner in Israel has the right to transfer its partnership interest freely (assignment) if the LPA doesn’t restrict itbarlaw.co.il. By contrast, U.S. LPAs almost always require GP consent to transfer LP interests (to control the investor base). Israeli fund agreements likewise typically include consent/first-refusal clauses to restrict transfers, but as an LP, confirm this matches your expectations – especially if you value liquidity or on the flip side, if you want assurance of a stable LP base. Additionally, Israeli law default says an LP cannot dissolve the partnership unilaterally by noticebarlaw.co.il (so LPs are effectively locked in, which is normal for closed-end funds). Finally, if there were multiple GPs, the default is majority vote among GPs decides mattersbarlaw.co.il – again, most VC funds have a single GP entity, so not an issue, but if the fund has a dual-GP structure (say two managing entities), check how decisions are made. Bottom line: Insist that the LPA is comprehensive. Do not rely on a “simple” reading alonebarlaw.co.il – engage legal counsel who knows Israeli partnership law to ensure no unfavorable default rule is lurkingbarlaw.co.il.

  • Tax Considerations for Foreign LPs: Israel is keen to attract foreign capital and provides favorable tax treatment to foreign investors in qualifying VC funds. Notably, foreign LPs are generally exempt from Israeli tax on capital gains from the fund’s investments, provided the fund meets certain criteriainternationaltaxreview.com. Israeli tax authorities issued guidelines (e.g., 2018 VC fund tax circular) specifying conditions: the fund must have at least $10M, a minimum number of investors, a substantial percentage of foreign investors (at least 30% of the fund), no single investor over a certain threshold, etc., and the GP and LP roles must be clearly separatedinternationaltaxreview.com. Most established Israeli funds will obtain a tax ruling or opinion to assure foreign LPs that no Israeli withholding or capital gains tax will apply to their distributions. As an LP, you should ask about the fund’s tax ruling status. This is somewhat analogous to how many European funds seek clearance under local tax regimes or use tax-transparent vehicles to protect foreign LPs. Additionally, be aware that an anchor LP taking a small stake in the GP’s economics (which sometimes happens to give an anchor reduced fees or extra upside) must be structured carefully due to Israeli rules – for instance, an LP holding >4% of the fund cannot hold >10% of the GP’s rights if the fund wants full tax exemption for that LPinternationaltaxreview.com. Your fund counsel can verify that any side arrangements don’t jeopardize your tax status. In summary, Israel’s tax environment for VC funds is generally very accommodating to foreign investors (no local tax filing usually required for foreign LPsinternationaltaxreview.com), making it straightforward for U.S. or European LPs to invest – just double-check that the GP has done the homework on those tax rulings.

  • Currency and Capital Calls: Most Israeli tech funds are denominated in U.S. dollars given the international nature of their portfolios and LP base. This mitigates currency risk for foreign LPs. If a fund were shekel-denominated (rare for VC funds aiming at global LPs), LPs should factor in currency considerations. Also, confirm the mechanics of capital calls and distributions – these should be clearly laid out and should not pose any unusual constraints. Israeli funds typically follow the standard model of drawing down capital as needed (with 10–14 days’ notice, often), just like U.S. funds.

In general, Israeli fund structures won’t feel foreign to seasoned private equity/vc LPs – they’re modeled after the Delaware-style limited partnership. The few local legal differences can be managed by ensuring the LPA explicitly addresses them. LPs should not shy away from asking the GP or counsel for a walkthrough of any Israel-specific provisions.

Governance and Investor Protections

Strong governance terms in the LPA are vital for protecting LP interests, especially in a jurisdiction where trust and relationships often play a big role. Fortunately, Israeli VC funds, especially those courting international LPs, tend to include standard governance and LP protection clauses similar to U.S. and European funds. Key governance provisions and what LPs should ensure include:

  • Key Person Clause: Also known as a "key man" clause, this provision is essential in any fund where success depends on one or a few individuals. A typical key person clause names one or more key GP team members (for example, the managing partners), and if those individuals cease to devote sufficient time to the fund or were to leave the management company, the clause is triggered. When triggered, usually the fund’s new investments are automatically suspended pending LPs’ instructionslarksuite.com. LPs may then vote to either terminate/suspend the fund or to continue under new terms or after a replacement is foundlarksuite.com. In negotiating an Israeli fund, ensure a robust key person clause covers all truly key figures – Israel’s VC scene is relatively small and often personality-driven, so you want assurance that if the star partner (say a famous ex-entrepreneur GP) walks away or is distracted, you have an option to pause or withdraw. The clause should specify what percentage of time commitment is expected (e.g. key persons must devote 100% of their professional time to the fund or at least X hours/year, etc.) and the process for LP approval to resume investing if a key person event occurs. Comparison: Key person clauses in Israel are very much in line with global norms; LPs globally push for stricter key person triggers. In recent years, LPs have even negotiated tighter key person “time dedication” requirements and automatic suspension triggersprivateequityinternational.com. Don’t hesitate to ask for the same standards you would in a U.S. or EU fund – Israeli GPs understand the importance of this clause.

  • Removal and “No-Fault Divorce”: While unpleasant to consider, LPs should have rights to remove or replace the GP in extreme situations. Standard practice is to have a “for cause” removal (GP can be removed by LP vote if the GP commits fraud, gross negligence, breach of LPA, etc.) and sometimes a “no-fault” early termination right (e.g. a supermajority of LPs can vote to dissolve the fund or remove the GP without cause, often after the investment period or with forfeiture of some carry). Israeli LPAs backed by institutional investors often contain these clauses, similar to U.S./UK agreements. Ensure that for-cause removal requires at most a reasonable threshold (perhaps 50%+ or 75% in interest) of LPs so that it’s practical to execute if needed. No-fault provisions are less common but very LP-favorable – if you have leverage (say you are an anchor LP or the fund is oversubscribed with institutional capital), consider pushing for a no-fault GP removal or fund dissolution right (maybe requiring 75–85% in interest vote). At minimum, there should be a mechanism for LPs to terminate the fund upon a key person event or other extraordinary event (usually with a supermajority vote) if the GP and LPs cannot agree on a path forward. These governance rights align incentives and protect against worst-case scenarios.

  • Advisory Board (LPAC): Most venture funds set up an LP Advisory Committee (LPAC) composed of representatives of several major LPs. The LPAC’s role is typically to review and approve conflicts of interest, valuation methodologies, any deviation from investment restrictions, or consents for extensions of the fund term, etc. If you are a significant LP, you might want a seat on the advisory board. Regardless, check that the LPA establishes an LPAC and outlines its key powers – for instance, approving transactions where the fund invests in a company where the GP has a stake, or waiver of certain LPA restrictions, or consents to extend the investment period/fund term. Israeli funds that include foreign institutional LPs almost invariably have an LPAC (sometimes called an Advisory Board), just as U.S. funds do, and they operate in a similar fashion. One area to be mindful of: Israeli business networks can be tight-knit, so the LPAC’s conflict-of-interest oversight is important if the GP might co-invest with other local funds or involve companies with ties to the managers. Ensure the LPAC also likely will be involved in key person or removal deliberations if those arise.

  • Transparency and Reporting: LPs should demand a high level of transparency from the GP regarding the fund’s activities and financials. At a minimum, the LPA or side letter should guarantee regular reporting – typically quarterly reports with portfolio updates and unaudited financials, plus audited annual financial statements. Specifically, look for provisions granting LPs information rights: quarterly or semi-annual letters, annual meetings, the right to receive detailed capital account statements, and perhaps the right to inspect books and records (within reason). Israeli funds generally report in English (as many LPs are international) and use international accounting standards (IFRS or U.S. GAAP). There may be Israel-specific accounting for tax purposes, but as an LP you want to ensure consistent, clear reporting of performance (IRRs, multiples), fees and expenses paid, and portfolio company status. ILPA Principles 3.0 emphasize that waterfall and fee calculations should be readily comprehensible and fully modeled for LPsilpa.org – you should expect no less transparency in an Israeli fund. Ask if the fund will provide an ILPA reporting template or similar standardized reports. Also, ensure the LPA contains provisions that require the GP to disclose all fees and expenses charged to the fund (including any deal fees, broken deal fees, etc.) and any GP affiliate transactions. Another aspect of transparency is LP communications and confidentiality: Israeli culture is often quite direct, and you should feel free to ask the GP hard questions during diligence. After investing, you want the relationship to be one of openness – many Israeli GPs are accustomed to active foreign LPs who ask for detailed updates. As a best practice, negotiate for an annual LP meeting in Israel (or virtual) where you can meet the team and see the portfolio first-hand; this can also be written into the LPA or side letter.

  • Investment Restrictions and ESG: If you have particular investment policy requirements (for example, you cannot invest in certain industries or countries for legal or ESG reasons), make sure the fund’s mandate is compatible or that you secure a side letter excusal right for such situations. Israeli funds typically focus on tech sectors (software, cybersecurity, etc.), so sector restrictions might not be a big issue unless you avoid, say, defense tech or other sensitive areas. Culturally or legally, note that Israeli funds invest heavily in Israel-related companies; ensure you are comfortable with the geographic focus (many funds will also invest a portion in U.S./global companies started by Israelis abroad). Some European LPs have ESG clauses they require (e.g. no investments that violate OECD guidelines or a promise to consider ESG factors). If relevant, include these via side letter. Israeli GPs, especially newer ones, are increasingly amenable to ESG and diversity commitments if LPs request them.

In summary, don’t compromise on governance standards. Israeli venture funds should give you the same protections you’d expect elsewhere: key person triggers to safeguard against team changes, rights for LPs to intervene or terminate in extreme cases, an active advisory board for oversight, and full transparency on what the fund is doing. If anything, given the high proportion of foreign capital in Israeli VC funds historically, many Israeli GPs have been trained by U.S. and European LPs to meet these governance expectations. Your task as an LP is to verify these clauses are present and robust in the LPA (or negotiate them if absent).

Side Letters and Special LP Arrangements

In addition to the main LPA, LPs often enter into side letters with the GP to secure specific rights or clarifications that apply only to them (or to certain classes of investors). Side letters are very common for venture funds globally and in Israel. LPs, especially large or strategic ones, use side letters to address their unique needs without changing the LPA for everyone. When negotiating with an Israeli VC fund, consider asking for side letter provisions such as:

  • Most Favored Nation (MFN) Clause: If you are not the largest investor, you may want an MFN ensuring that no other LP receives more favorable economic or governance terms than you, or that you have the right to elect into any such terms. This protects smaller LPs from missing out on perks given to a big anchor. Note that side letters often carve out certain provisions from MFN (e.g., they might exclude provisions granted to governmental or strategic investors, or those relating to fee breaks for large commitments). Nonetheless, negotiating an MFN right (at least among peers in your commitment size) is wise. Israeli funds typically honor MFNs similar to U.S. practice – just be aware that if you are a modest ticket, the GP might restrict MFN applicability. Ensure the MFN at least covers governance/informational rights.

  • Fee or Carry Discounts: An anchor LP or early close LP might negotiate a management fee reduction or even a rebate of a portion of the GP’s carry for their commitment. For example, a very large Israeli institutional LP might get a 1.5% fee instead of 2%, or the GP might agree to waive the management fee on that LP’s commitment (effectively letting them invest fee-free)angellist.com. Side letters can document these bespoke economics. If you are a major contributor, this is worth discussing. Side letters can also give excuse rights from paying certain fees (for instance, if you’re tax-exempt, you might negotiate not to bear the cost of certain taxes or unrelated business taxable income). Bear in mind, any fee waiver or cap for one LP must be absorbed by the GP or spread among others as ILPA notesilpa.org; large Israeli funds will be familiar with this concept.

  • Co-Investment Rights: LPs often want the opportunity to co-invest in portfolio companies alongside the fund (usually with no fees or carry on the co-invest). In Israel’s fast-moving tech market, a fund might encounter a deal larger than it can fully take; having co-investment rights allows interested LPs to put additional capital to work. A side letter might stipulate that the LP will be offered co-investment opportunities pro rata or up to a certain amount, subject to availability. While co-invest rights are not guaranteed (and GPs guard flexibility), if you are a significant LP, try to get at least a first look or priority allocation for co-investments.

  • Reporting and Audit Rights: If you require specific reporting (e.g., in a certain format, or additional ESG reporting, or more frequent updates), detail that in a side letter. Many public or institutional LPs also require clauses about audit rights or an obligation for the fund to provide information necessary for the LP’s own regulators. Israeli GPs are used to such requests, especially if they have European LPs who need to satisfy transparency under AIFMD or similar. For example, you might include that the fund will deliver an ILPA-compliant quarterly report, or that the GP will cooperate with any reasonable information requests related to your internal risk management.

  • Legal & Regulatory Provisions: Depending on your status, you might need certain representations or covenants. Common ones include ERISA provisions (for U.S. pension LPs, ensuring the fund is operated so as to qualify as a VCOC and not hold “plan assets”), or sovereign immunity and public records clauses (for government LPs who need confidentiality except as required by law), or placement agent disclosure assurances (compliance with anti-corruption laws). If you are a U.S. or European institutional LP, you likely have a standard side letter addendum of such provisions – negotiate them upfront. Israeli funds have generally encountered these through other foreign LPs, but do confirm the GP is willing to sign onto them.

  • Excuse/Exclusion Rights: If there are certain types of investments that could pose a problem for your organization (for example, violating your charter or causing regulatory issues), you can get an excuse right via side letter. For instance, some LPs cannot invest in gambling or defense-related businesses, or companies in certain countries. The side letter can state that if the fund is about to make an investment that would cause the LP to violate a law or policy, the LP can be excused from funding that capital call. The LPA often has a generic version of this, but a side letter can tailor it to your needs. Given Israel’s focus on tech, this might rarely be invoked, but it’s a good safety net.

  • Placement Agent and Local Tax Side Agreements: In some cases, if you came through a placement agent or if you need the fund to bear certain local taxes (like stamp duties or withholding on distributions), side letters handle that. Also, if any special arrangements were promised (like an advisory board seat, as mentioned, or the GP providing you a side analysis or observer rights on the investment committee), those belong in a side letter.

When dealing with side letters, also consider enforceability under Israeli law. Side letters are binding contracts. Israel will generally honor them, but you want to ensure the side letter does not inadvertently contradict the LPA without being clearly acknowledged by all parties. A best practice is to include in the side letter (and sometimes in the LPA) a statement that if any side letter rights are granted, they either apply to all LPs of a certain class or that other LPs have been offered MFN. This avoids later disputes. Additionally, be mindful of the MFN chain reaction: if you give one LP a special deal via side letter, others with MFN might elect it, which the GP must manage.

In Israeli funds, side letters have become quite standard, especially because many funds have a mix of local and international LPs with different requirements (for example, Israeli institutional LPs might have their own demands, and U.S. endowments have theirs). Always review the side letter carefully and coordinate it with the main LPA. From an LP perspective, the side letter is your chance to customize your relationship with the fund – use it to address any concern not already covered sufficiently in the LPA.

Comparing Israeli, U.S., and European Market Practices

While Israeli VC fund terms are largely in harmony with U.S. and European practices (thanks in part to the global nature of LP capital), there are a few differences worth highlighting in a comparative context:

  • Regulation and Fund Oversight: European funds (EU-based managers) must navigate regulatory frameworks like the Alternative Investment Fund Managers Directive (AIFMD), which imposes certain transparency, custody, and risk management rules. U.S. venture funds are exempt from many regulations if they stay within investor number limits, though large managers must register with the SEC. Israel, on the other hand, does not impose a similar fund manager regulatory regime for venture fundslexology.com. The Israel Securities Authority’s involvement is mostly through enforcement of private placement rules and anti-general-solicitation rules, not ongoing fund supervisionlexology.comlexology.com. For LPs, this means that when investing in Israel, you rely even more on the negotiated terms and the reputation of the GP, rather than regulatory protections. However, many top Israeli GPs voluntarily adhere to international best practices to maintain LP trust.

  • Fund Term and Exit Timing: The typical 10-year fund with possible extensions is universal, but one noticeable trend is that Israeli VC funds have sometimes needed longer investment periods or fund lives as the ecosystem matures. In fact, since the early 2000s, Israeli funds often allow a 5-6 year investment period (vs. the standard 5)dglaw.co.il, acknowledging that finding and growing deep-tech startups can take time. U.S. and European venture funds also sometimes extend if exits are slow, but Israeli funds explicitly building in longer timelines was a response to local market conditions. LPs should ensure they are comfortable with the potential for a longer horizon; compare this to some European funds that occasionally have a shorter investment period if they focus on quick deployment. In any case, an extension should always require LP consent via the LPAC – this is standard globally.

  • Distribution Waterfall Styles: As noted, U.S. funds (especially venture) often use a deal-by-deal distribution model with clawback, whereas European funds typically use a whole-fund model with an 8% preferred return. Israeli venture funds historically have followed the U.S. VC norm: no guaranteed pref return to LPs, and carry can be taken as exits happen (though many modern Israeli funds, especially those with European LPs, are amenable to whole-fund waterfalls). If you as an LP have a preference (for example, you strongly prefer European-style distribution for investor-friendliness), you can negotiate that. It’s not unusual for an Israeli LPA to define that all capital must be returned to LPs before carry distributions (even if no fixed hurdle rate). Always compare the waterfall terms to what you see in your U.S./EU fund investments; they should be within the range of normal. If an Israeli GP tried something out of line (say, carry above 20% or a low hurdle with deal-by-deal carry), you should push back firmly – the market would rarely support that unless offset by extraordinary GP commitments or track record.

  • Management Fee Levels: Globally, management fees tend to scale with fund size. A small first-time VC fund in any country might ask for 2.5% annual fee (sometimes stepping down later) because the absolute dollars are small. In Israel, fund sizes have grown in recent years but are still often in the mid-sized range (e.g. $50–150 million). A 2% fee is commonangellist.com, which is in line with U.S. funds of similar size. Some European funds, especially those with government investors or operating in lower-cost environments, might charge slightly less (1.5-1.8%). The difference is not huge, but European LPs occasionally push fees down. Israeli GPs have not shown a pattern of higher fees than elsewhere; if anything, competition for foreign LP capital keeps them competitive on fees. Always evaluate the fee in context: For example, a $300M fund at 2% might be generous coverage for an Israeli team, whereas a $50M micro-VC at 2.5% might barely cover costs – so judge accordingly.

  • Carried Interest Percentage: 20% carry is essentially standard across venture capital worldwide (with rare exceptions of 25-30% for some top-tier or smaller funds). Israeli funds almost universally stick to 20%. We don’t see the “super-carry” that occasionally appears in certain European PE funds or some U.S. micro-funds (like 30% carry if certain performance thresholds are hit – unless this is explicitly in the partnership terms for a very performance-based model). If you encounter a carry higher than 20% in Israel, it should be justified by exceptional circumstances and paired with LP-friendly terms (for instance, maybe a 10% GP commitment or a very high hurdle). Otherwise, 20% is the benchmark, and Israeli GPs know that.

  • Use of Side Letters: Side letters are common in all regions, but perhaps more ubiquitous in Europe due to many state-affiliated LPs each having their laundry list of requirements. Israeli funds, having a diverse LP base (local pension funds, U.S. endowments, European fund-of-funds, etc.), end up juggling multiple side letters. There is no major difference in types of side letter provisions – U.S. and European LPs alike ask Israeli GPs for the same accommodations (excuse rights, MFNs, reporting, etc.). One thing to note: if an Israeli fund has Israeli governmental investors or Innovation Authority funding, there might be unique side letter terms related to policy (for example, the government might get observer rights or Israel-focused investment minimums). As a foreign LP, you should inquire if any such arrangements exist, because they could indirectly affect you (e.g. if the fund is compelled to invest X% in Israeli-incorporated companies, that might align or differ from your expectations).

  • Legal System and Enforcement: Enforcing an LPA in Israel is generally as straightforward as in other common law jurisdictions (Israel’s legal system is a mix of common law tradition with its own statutes). In the U.S., Delaware courts are the usual venue; in Europe, often UK or local courts or arbitration in places like Sweden or Switzerland for international funds. Israeli LPAs might specify Tel Aviv courts or arbitration in Israel. While the difference seldom comes into play if the relationship is good, as an LP you should note the dispute resolution mechanism. If you’re more comfortable with arbitration under ICC or LCIA rules, many Israeli GPs would accommodate that in the LPA or side letter. Culturally, Israelis tend to prefer resolving issues via negotiation rather than litigation – that can work in LPs’ favor if a consensual approach to problems (like a key person event or underperformance) is taken, but you still want the legal fallback of clear rights and remedies.

  • Cultural Communication Style: This is less a term difference than a practical point: Israeli business culture is often informal and straight-talking. Compared to some U.S. East Coast GPs or European GPs who might be more formal in communications, Israeli GPs might communicate with LPs in a more direct, sometimes less polished manner. LPs should nonetheless insist on formal reporting as noted. But don’t be surprised if you also get WhatsApp updates or phone calls – many Israeli fund managers pride themselves on being very accessible to their investors. In negotiations, this direct style means you can often have frank discussions on terms. Use that to your advantage: ask why a term is the way it is, and you’re likely to get an honest explanation. The trust factor is big in Israel (“relationship capital”), so establishing a good rapport can sometimes achieve more than strict legal posturing. Of course, always back up any understandings in writing (LPA/side letter).

In essence, Israeli VC funds operate at the intersection of U.S.-style venture capital and the unique “Startup Nation” milieu of Israel. For an LP coming from the U.S. or Europe, the learning curve on terms is small – most differences are nuances. By applying the same rigorous scrutiny as you would in your home market, and noting the specific Israeli context mentioned above, you can negotiate a fair and protective arrangement.

Conclusion

Investing in Israeli venture capital funds can offer exposure to one of the world’s most vibrant innovation ecosystems, but it is crucial for LPs to negotiate terms that protect their interests and align incentives. Always start with thorough due diligence on the GP’s track record and reliability, then drill down into the term sheet and LPA details. Key terms like management fees, carry, GP commitment, key person clauses, and transparency rights should meet the standards you expect anywhere – typically they do, given Israeli funds’ adherence to global norms, but it’s up to you to verify and negotiate where needed. Pay special attention to Israel-specific legal considerations (such as default partnership provisions and tax arrangements) and don’t hesitate to seek legal counsel with Israeli fund experience to review documents.

By securing reasonable economic terms, strong governance provisions, and any needed side letter rights, you’ll set the foundation for a successful LP-GP partnership. The best Israeli GPs will welcome informed questions and negotiations – they know that sophisticated LPs ultimately make for stronger long-term partners. With clear agreements in place, LPs can confidently commit capital to Israeli VC funds and focus on the upside: participating in the growth of cutting-edge startups, backed by a fund whose terms ensure accountability and alignment.

Ultimately, the goal for an LP is to achieve parity with the best practices you’re accustomed to in the U.S. and Europe, while accounting for the Israeli context. Armed with the insights and comparisons outlined above, you should be well-prepared to evaluate term sheets and negotiate side letters with Israeli venture funds. As always, the partnership with a GP is built on more than just the contract – but a solid contract is what allows that relationship to flourish on a stable, mutually respectful footing. Good luck with your negotiations, and welcome to the Startup Nation’s investment arena!

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