7 Questions UAE Founders Must Ask Before Giving Away Equity

Business owners in the UAE always have to make exceedingly critical choices that shape the direction of their enterprises. One of these is with regard to the allocation of equity, which significantly affects the business’ control, success, and governance. So, how do you make a decision on this front? Bianca Gracias, Managing Partner of Crimson Legal, a boutique legal consultancy licensed, experienced, and based in the UAE, lists seven essential questions that founders in the country should ask themselves prior to giving up equity.

1. Which structure best serves my business requirements and equity deployment strategies?

The UAE offers various corporate forms with differing equity structuring implications. The significant choice is where you wish to locate your business, mainland, or a free zone.

Free zone companies have been the preference for foreign investors in terms of absolute ownership. They fall under the jurisdiction of their respective free zone authority, rather than UAE mainland law. Although they allow 100 percent foreign ownership, tax holidays, and simpler management, they cannot freely trade in the UAE mainland other than through a local agent or distributor.

Mainland companies today provide unfettered access to the UAE market. They previously required 51 percent local Emirati ownership under the old regulations, creating equity concerns for foreign founders. With the 2021 reform of the UAE Commercial Companies Law, it is now possible for foreign investors to fully own mainland companies in all but a handful of sectors.

Consider your long-term business goals when choosing a structure. If you will be dealing with international clients or UAE markets remotely, opt for a free zone entity. If direct access to the local market is of the utmost importance, a mainland company is ideal, although more expensive.

Aside from mainland vs. free zone, consider whether you require an operating or holding structure. Your choice affects future equity transactions, investor relations, and exit.

2. What are the legal requirements for equity sharing in my preferred structure?

Mainland limited liability companies (LLCs) can be 100 percent foreign-owned in many “approved” activities, but certain strategic sectors require Emirati ownership. They are governed by the UAE Commercial Companies Law, which sets minimum capital requirements by emirate and activity.

Free zone companies are governed by specific regulations that vary significantly from zone to zone. Each free zone has its own regulations concerning companies, share capital, and limitations on the transfer of shares. Some allow alternative classes of shares with different rights, while others are stringent.

The majority of UAE corporate plans involve right of first refusal provisions, which compel existing shareholders to be offered shares prior to transferring them to third parties. Some free zones also necessitate administrative approval for share transfers, restricting the rights of equity transactions.

The UAE Commercial Companies Law prescribes certain shareholder resolutions, some of which require special or unanimous approval. Being aware of these voting thresholds is important for equity distribution, because minority shareholders can veto major decisions.

3. How do founders and early investors divide equity?

Founder and early investor equity distribution must be reasoned on the grounds of more than a first contribution of capital. It is a risky move when high performing startups distribute equity by a common conclusion of each contributor’s input.

Consider the following when allocating founder equity:

• Intellectual property contribution
• Time commitment (fulltime or part-time)
• Industry experience and network
• Capital contribution (initial and subsequent)
• Operational duties and leadership role

Equal equity splits among founders do not pan out over the long term. Instead, use a contribution-based split that is a function of each founder’s value. This prevents resentment down the road based on different levels of contribution or work.

Equity distribution by early investors needs to be determined through valuation negotiations, considering current contributions and capital needs going forward. It is recommended not to give up too much equity upfront—a frequent UAE founder error in seeking initial capital. Each percentage point surrendered affects ownership, control, and profit-sharing.

In the UAE, where business and personal relationships get intertwined, proper documentation of equity expectations and splits is essential. Local cultural practices may prompt founders to make verbal equity promises, which will subsequently create legal issues. All equity transactions must be documented legally and with clarity from the start.

Bianca Gracias, Managing Partner, Crimson Legal. Courtesy of Crimson Legal.

4. What vesting schedules and mechanisms ought to protect the company?

Vesting schedules are crucial but often overlooked by UAE startups. They render equity earned over a period of time, protecting the company if a founder or early employee leaves prematurely.

In the UAE startup ecosystem, standard vesting usually has a cliff and a four-year term. Shareholders do not receive any shares for the first year (the “cliff”) and then receive shares on a monthly or quarterly basis over the remaining three years.

Consider the following when drafting vesting provisions:

• Cliff periods appropriate to your business time frame
• Acceleration clauses if the company gets acquired
• Mechanisms for handling “bad leaver” scenarios (termination for cause)
• Reverse vesting for founders who have already been issued their shares

While vesting schedules are typical in mature startup ecosystems, they are far less common at most UAE companies. It’s a high-risk enterprise with real possibilities, where founders could leave the company while holding huge shares, without contributing equally to the growth of the firm, resulting in deadlock situations, and scaring away new investors.

Flexible vesting is permitted under UAE law in design arrangements, though they must be documented in articles of association and shareholders’ agreements to be enforceable. As a result of the UAE’s civil law regime, vesting conditions need to have clearly defined triggers and consequences, rather than depending on common law.

5. What should shareholders’ agreements protect against?

Shareholder agreements control equity holder relations outside of articles of association. In the UAE, where minority shareholder protection is not strong, carefully drafted agreements are essential.

Protection clauses include:

• Anti-dilution protections maintain ownership percentages for future rounds of financing
• Right of information to guarantee the availability of business updates and financial statements
• Board representation rights or observer status
• Issues preserved require specific shareholder approval
• UAE legal dispute resolution processes

Safeguards are also required to save minority shareholders from majority oppression. Majority shareholders have to balance cautiously the rights given to minority investors or else too extensive provisions will undermine decision-making and operational flexibility.

6. What are the tax consequences of different equity structures?

The UAE’s tax landscape has been transformed by the introduction of corporate tax in June 2023. This has implications for decisionmaking on equity structures that were previously operationally driven.

Remember these when structuring your equity:

• Impact of profit sharing on tax effectiveness
• Withholding tax implications on foreign shareholders
• Transfer pricing issues in international business
• The impact of UAE tax laws on shareholders’ home country or the holding company tax regimes

International founders and investors must carefully consider how UAE tax legislation intersects with the legislation in their home country or holding company. Double taxation, foreign ownership reporting, and controlled foreign corporations can all significantly impact equity holders’ effective tax rates. Equity instruments such as ordinary shares, preferred shares, and convertible notes have different tax treatments in different jurisdictions.

The UAE remains a low-tax authority, but failing to account for tax in equity structures can give rise to liabilities and diminish shareholder returns. Understanding tax implications is key before negotiating equity structures.

7. What exit and liquidity events need to be planned?

One of the most vital aspects of equity allocation is planning for future exits or liquidity events. When there are clear avenues for equity holders to capture value, even the best opportunities get bogged down by ownership deadlocks.

Primary exit provisions include:

• Tag-along rights enable minority shareholders to participate in majority owners’ sales
• Drag-along rights enable majority shareholders to compel minority shareholders to participate in the company’s sale
• Characteristics enabling systematic selling or buying of stocks
• Right of first refusal over stock sale
• Mandatory exit conditions that are triggered by specific events or dates

The UAE market has its own unique exit issues. Though increasingly more merger and acquisition transactions and some successful initial public offerings are materializing, exit opportunities are still not as plentiful as in developed markets. This reality highlights the need for contractual exit strategies for UAE businesses.

Founders are prioritizing growth over planning their exit until required, to the detriment of negotiation and exit value. Exit planning must be built into equity structures at the outset in order to allow shareholders liquidity.

The regulatory environment for mergers and acquisitions in the UAE has evolved significantly, driven by stronger local capital markets. Executing these processes takes expertise and foresight. Your equity structure needs to enhance exit strategies in the future, not hinder them.

THE TAKEAWAYS

Equity division decides not only ownership, but also governance structure, operating leeway and future development avenues. As such, equity distribution should not be undertaken lightly.

These are recommended actions to consider:

1. Consider your business objectives and target markets before making the choice between mainland and free zone. Record the reasons for future reference.
2. Appoint experienced legal advisors who are knowledgeable in UAE company law and corporate structures. Sound legal advice is cheaper than repairing inadequate arrangements.
3. Institute a formal plan of equity distribution that considers equitably the contribution of every founder and investor along various dimensions. Update this plan periodically as contributions and roles change.
4. Impose uniform vesting conditions on all equity holders, including founders. Include them in shareholder agreements and employment contracts where required.
5. Create detailed shareholder agreements for governance, decision-making, access to information, conflict resolution, and exit provisions. Update them annually as the organization matures.
6. Implement institute governance processes that deliver transparency and alignment to equity holders, including regular financial reporting and strategic updates.
7. Establish a tax-effective structure with advisors who understand UAE and global tax implications for your shareholders.
8. Record all the equity discussions and decisions in detail since the UAE legal system assigns top priority to documented proof in case of any dispute.

Proper planning and advising are required for effective equity structuring in the UAE to support—and not hinder—your business ambitions. The equity decisions you make today will impact your company’s future. Welcome them, and record these with the strategic attention they require.

This article first appeared in the June 2025 issue of Inc. Arabia magazine. To read the full issue online, click here.