Between Tel Aviv and Delaware: Where Should You Incorporate Your Company?

In recent weeks, I keep hearing the same question over and over: “Where is the right place to open my company—in Israel or abroad?”

This is not a technical question. It is a question that comes from a place of deep deliberation, especially at a time when our economic and geopolitical reality is changing rapidly and is in an unprecedented state of financial uncertainty.

To answer it, we first need to look at the big picture: how did we get to a point where this decision is so complex? What happened to the Israeli economy following October 7? And what are the real considerations a founder needs to take into account when building their company today?

What was the situation before October 7?

Until a few months ago, the Israeli economy was considered very stable in macro terms.

• Debt-to-GDP ratio: only 60%, one of the lowest in the OECD. Thanks to responsible policy over the years, Israel managed to keep its debt level low even in an era of significant growth in spending.

• Foreign exchange reserves: about $200 billion in reserves at the Bank of Israel, which served as a significant safety net against any external shock.

• The high-tech industry: attracted foreign investment at a rapid pace, with record capital raising in 2021 and 2022.

But beneath the surface, it was clear that our socio-economic foundation was dealing with significant weaknesses:

• The housing crisis: housing prices soared to levels that made Israel one of the most expensive countries in the world.

• The healthcare system: insufficient budgets, staff shortages and growing strain on the system.

• Education gaps: the education system failed to keep up with the needs of the future job market, especially in the periphery.

In other words, at the macro level we were strong, but at the micro level we were already feeling the pressure.

How did the war change the picture?

October 7 led to a deep shock, both social and economic:

1. The defense budget: soared to fund a prolonged war and a new state of readiness.

2. Damage to GDP: hundreds of thousands of workers had to be absent due to reserve call-ups, businesses closed, and productivity dropped significantly.

3. Concern among foreign investors: investors looking at the geopolitical risk are starting to ask themselves whether it is worth putting money into an Israeli company.

4. Growing debt: the debt-to-GDP ratio is expected to rise significantly, which raises questions about the ability to maintain long-term stability.

What is happening to the Startup Nation?

Before the crisis

Israel was at the forefront of global innovation:

• High-tech as a growth engine: Israeli companies raised record-breaking sums, attracted foreign investors, and led fields such as cyber, climate tech and digital health.

• A unique concentration of ecosystem: networks of founders, academia and investors created an exceptional working environment.

• A sense of security: the geopolitical risk existed, but it was perceived as part of the game, not as a significant barrier.

After the crisis

• A sharp drop in capital raising: a 55% drop in funding in 2023 compared with the previous year.

• A change in the investment mix: investments are focusing on more mature companies, with less funding for early stages.

• Companies fleeing abroad: more companies are doing a flip, meaning they become foreign companies in order to attract investors.

• Early exits: quite a few companies are being sold too soon, sometimes at a low price, out of fear of the future.

So what exactly is a flip?

A flip (flip structure) is a process in which an Israeli company changes its legal structure so that the parent company is registered abroad (usually in the US or Europe), and the Israeli company becomes its subsidiary.

This is not just a technical matter, but a strategic decision whose purpose is to make it easier to raise capital from foreign investors, lower the perceived level of risk, and allow regulatory flexibility ahead of an IPO on foreign stock exchanges.

When does it make sense to flip?

• When approaching foreign investors: American and European investors tend to feel more secure when the company is registered abroad.

• When planning an IPO: such a structure is almost always required ahead of an IPO on exchanges like NASDAQ.

• When it comes to a global product: companies that focus on international markets benefit from regulatory flexibility and an improved reputation.

When doesn’t it make sense?

• When relying on grants and government support: the Israel Innovation Authority and government grants are intended for companies registered in Israel.

• When the R&D center remains in Israel: moving to a foreign structure can add unnecessary costs and create friction with the local authorities.

The key considerations in the decision

Advantages of opening a company in Israel

1. A leading ecosystem: a strong infrastructure of innovation, knowledge and connections.

2. Government support: grants and tax incentives for Israeli companies.

3. Competitive development costs: despite the high cost of living, development costs are still relatively low compared with the US and Europe.

Disadvantages

1. Geopolitical risk: concern among foreign investors and erosion of trust.

2. A limited local market: focusing only on the Israeli market can be a barrier to growth.

3. Brain drain: talented employees are leaving for abroad in search of stability.

So where should you open your company?

There is no one answer that fits everyone. The decision depends on your business model, your target market, and your growth strategy.

• If your product is global and you are targeting foreign investors—a flip or a dual structure may be the solution.

• If you need government support and rely on the local ecosystem—an Israeli-registered company can still work in your favor.

In the end, entrepreneurship is not only about where you start, but about how you build a smart strategy that will allow you to grow.

Take the time to examine every aspect—sources of funding, target market and regulatory support—and make a decision based on a deep understanding of your needs and of the environment in which you operate.