What are ESOPs in the UAE Complete Guide

Employee Stock Option Plans, or ESOPs, are a special way companies in the UAE reward their workers. It is by giving them a chance to own a part of the business. This means employees can share in the success and growth of the Company.

In this guide, you will learn what ESOPs are, how the laws in the UAE support them. And why they are important for startups to keep and attract good talent. The goal is to explain ESOPs in simple words so everyone can understand how they work and why they matter.

What Are ESOPs?

ESOPs in the UAE are Employee Share Ownership Plans. They let workers buy company shares at a low set price later. Shares unlock after vesting schedules and cliffs. This makes employees feel like owners. When the Company grows big, workers win money at the sale or IPO.​

Companies save cash with ESOPs. No big salary needed now. Employee share option schemes UAE reward hard work. UAE employee equity compensation incentives help startups hire top talent. Workers stay longer to get full shares.

Why ESOPs Matter for UAE Companies

ESOPs in the UAE help companies win big:

• Hire global talent without high salaries.​
• Vesting schedules keep workers for 4 years.​
• Save cash – pay only at the company sale/IPO​
• Workers act like owners, push growth hard.​
• Perfect for stock options for startups UAE in tech/AI​
• 100% foreign ownership makes ESOPs easy now

ESOPs vs Cash Compensation: Key Differences

• ESOPs give ownership: Employees get shares, not just money. They benefit if the Company grows and sells.
• Cash pays now, ESOPs pay later: Cash bonuses give immediate money but stop quickly. ESOP rewards grow long-term with the Company’s value.
• ESOPs save startup cash: Startups don’t pay big salaries upfront. They reward employees only if the Company succeeds.
• ESOPs increase loyalty: Workers stay longer for share vesting. Cash bonuses don’t always keep workers long.

• Phantom stocks combine both cash outs and stock price appreciation, but you do not actually receive stock. This works for companies that want to avoid transferring shares.

How ESOPs have Advanced in the UAE

Cash out Compensation (Pre-2020)

• Companies in the UAE utilised cash bonuses and phantom stock.
• The local 51% ownership law prevented real ESOPs in UAE.
• Foreign employees found it difficult to gain permanent equity.
• Employees departed quickly as there were no vesting schedules or cliffs.
• Cash is burned on salaries in excess for startups.
• Phantom stock became popular in the UAE as cash out was immediate, and no equity ownership was given.

2020 Foreign Ownership Revolution

In 2020, the UAE changed its big laws. Companies can now have 100% foreign owners in over 1,000 business types. Dubai DED and Abu Dhabi departments approve lists. No more 51% local partner needed.

This opened doors for real ESOPs in the UAE. Foreign workers can get company shares. Employee share option schemes UAE have become easy. UAE ESOP laws support growth now.

Cultural Shift: UAE Embraces Equity

The UAE is changing how companies reward workers. More companies now give shares, not just cash. Workers learn that owning part of the Company is valuable. This makes them work harder and stay longer.

Expats from big tech bring equity ideas. Local workers see how equity helps them grow rich if the Company does well. Startups use an ESOP pool for startups to build strong teams where everyone feels like an owner.

This cultural change makes employee share option schemes more popular and important every year. It helps companies grow faster with loyal workers.​

Rise in Tech, AI, Finance Sectors

Tech, AI, and finance companies lead the way in using ESOPs in UAE. These sectors need highly skilled workers and big investments. Giving shares helps attract and keep the best people.

Cities like Dubai and Abu Dhabi become hubs for startups in these industries. Startups use stock options in startups UAE to motivate teams. ESOPs make companies more competitive and ready for big growth.

This rise in using ESOPs is a key reason the UAE is becoming a top place for tech and finance innovation in the region.

UAE Legal Framework

Federal Law No. 2/2015 (Commercial Companies)

This law started in July 2015. It first allowed ESOPs in the UAE. Companies vote to add shares just for workers. Shareholder approval for ESOPs is needed. Big win: Old owners cannot block worker shares. No preemption rights.​

Federal Decree-Law No. 32/2021 Updates

The 2021 law updates old rules. Supports 100% foreign ownership changes. A special meeting is still needed for employee share option schemes UAE. Covers new business types better.​

ESCA Regulations & Guidelines

ESCA makes ESOP rules. Draft limits shares to 10% new capital. The Board sets vesting schedules and cliffs, price, and who joins. Quarterly reports required.

10% Share Capital Cap  

Thanks to the new laws within the UAE, businesses can now give out up to 10% of their new share capital to employee stock ownership plans (ESOPs).  

The Emirates Securities and Commodities Authority (ESCA) developed this regulation to stop the excessive dilution of stakeholders and maintain the equilibrium of the Company. Specifically, for startups, this means the ESOP pool for UAE startups usually sits between 5% and 10%. This prevents disproportionate ownership and allows all employees to have their fair share of ownership. This regulation assists in balancing the motivation of employees with the protection of company shareholders.  

No Preemption Rights  

The removal of preemption rights is the most important advancement in the new laws around the UAE ESOP. It is for existing shareholders of shares issued under an ESOP. Previously, current shareholders had the first right to purchase new shares. This could block or delay the issuance of shares to employees. Since Federal Law No. 2 of 2015, employees under employee share option schemes UAE can receive shares directly. Without existing shareholders’ approval, simplifying the process and making ESOPs more practical.​

Employee-Only Participation

UAE ESOP laws specify that ESOP participation is strictly for employees. It is to encourage long-term employment and align interests. Directors and board members are excluded from these plans to avoid conflicts of interest. However, the Company can also structure the equity-like rewards for directors or contractors using phantom shares. Phantom shares are equity-like as they payout based on the Company’s performance, but do not transfer any ownership. This assists with regulatory requirements, as it provides no ownership. However, it can still incentivise important contributors who are not employees.

Employee Ownership Structures in the UAE

Cliff Vesting (Most Common)

The most popular form of vesting is Cliff Vesting, in which all the shares will be unlocked after a specific period of time, most commonly set to 1 year. Employees need to stay for 12 months in order to receive any of the shares. This is also the most popular form of vesting in the UAE ESOP market. This is a simple way of ensuring that employees stay.  

Graded & Ratable Vesting

Graded vesting is where the shares are unlocked in a step-wise manner, for example, 25 per cent each year for 4 years. In ratable vesting, a small percentage of the shares is unlocked each month or quarter. Smooth rewards over time.​

Phantom Shares (Cash Alternative)

Phantom shares UAE pay cash based on share growth. No real shares given. Perfect for LLCs with shareholder limits. Easy under UAE ESOP laws.​

4-Year Standard Schedule (67% Usage)

67% UAE startups use 4-year vesting + 1-year cliff. Year 1: 25% unlocks. Rest monthly for over 3 years. Global standard for ADGM stock option rules for startups UAE.

Jurisdictional Guide

Mainland UAE

In the mainland UAE, companies follow federal rules with some ownership restrictions. Certain sectors limit foreign ownership, affecting who can get direct shares. A large number of organisations have turned to phantom shares in the UAE. Such arrangements facilitate the establishment of cash-based incentive plans based on equity without actually transferring shares of the Company. Such plans serve to enhance employee motivation while staying compliant with regulations.

Free Zones (DIFC/ADGM)

DIFC & ADGM Free Zones facilitate the operation with the benefit of the Common Law and more flexible frameworks on ESOPs. Such zones enable the usage of Special Purpose Vehicles (SPVs), Trusts, and Nominee Shareholders, which allows them to hold shares on behalf of employees in order to address foreign ownership concerns. This framework allows complete employee ownership for foreign employees, which is why such Free Zones are quickly gaining popularity among new businesses wanting to provide employee equity compensation incentives. 

Company Types

When it comes to Joint Stock Companies, the Shareholders are required to approve such a move at a general assembly with a 75% majority. Furthermore, they are often required to report to ESCA with regard to their ESOPs. They have more complex compliance requirements; however, they do permit a broader issuance of shares.

In the case of Limited Liability Companies (LLC), there are requirements such as a maximum of 50 Shareholders, which pose some challenges. They usually opt for phantom shares or cash-based plans as opposed to real shares.  Private companies have a more lenient set of reporting requirements, while public companies are under more stringent compliance requirements set out under the UAE laws.

Step-by-Step Implementation

Step 1: Creating an ESOP Share Pool 

Allocate 5-15% of company shares to an ESOP. Ensure it is within the limits of ESCA’s 10% cap. Setting the pool size is at the discretion of the Board.

Step 2: Drafting of Trust Documents

Write out ESOP documents pertaining to the Trust, plan, grant, and award letters. Specify the vesting schedules, exercise price, and rules surrounding the departing employee. Use templates and conduct a legal review.

Step 3: Obtaining Shareholder or Board Approval

A Special General Meeting must be called, and the Employee Share Ownership Plan must be approved by 75% of the shareholders present. Joint stock companies also require ESCA approval to proceed.

Step 4: Establishing a SPV or Trust (Free Zones)

In the DIFC or ADGM, establish a Special Purpose Vehicle (SPV) or Trust that will hold the shares on behalf of the employees. This mitigates issues that may arise due to foreign ownership regulations.

Step 5: Accounting and Auditor Review

Have the auditors review the anticipated financial impacts of the ESOP on the Company’s financial statements. Phantom share programs have less complex accounting rules.

Step 6: ESCA Reporting

Report quarterly to ESCA on the issued shares and the participants. Ensure you maintain compliance as an ongoing obligation throughout the year.

Time to complete from start to finish, the setup to be ready for the incentivised workforce generally takes from 1 to 3 months.

Best Practices and Templates Provided

Buyback Clauses (Good/Bad Leavers)

The Company will repurchase its shares when employees leave. Good leavers will be those who leave in ordinary circumstances, such as voluntary resignation or retirement. In contrast, Bad leavers will be classified as those who the Company terminates for cause or who have stolen. Good leavers will be compensated at full market value for the shares. Bad leavers will either lose unvested shares or be subjected to a vesting discount. Protects the ESOP pool for UAE startups.​

Liquidity Event Triggers

Workers exercise options only at big events like IPO, acquisitions, or company sales. Saves cash now. Common in DIFC ESOP regulations. Matches vesting schedules perfectly.​

Free Carta Templates

Carta + Simmons & Simmons offer free UAE templates:

• Time vesting agreement
• Performance vesting agreement
• Exercise notice form
• Download, customise with a lawyer. Ideal for stock options for startups UAE in the UAE.  

Operational Success Tips  

• Simplify ESOP Structure for UAE Employees.
• Track grants in the cap table software. 
• Determine annual review requirements with auditors.  
• Trust is built through transparent communication.  
• Utilise Special Purpose Vehicle (SPV) Managers in Free Zones.  

Challenges and Proven Solutions  

• Preemption Rights (Fixed)  

Old issue: Shareholders would block ESOP shares with first-buy rights. Federal Law No. 2/2015 eliminated preemption for ESOPs in UAE. Now workers receive the shares directly.  

• Limitations on Shareholders of an LLC  

An LLC in the UAE can have a maximum of 50 shareholders. Makes it challenging for the Company to onboard a lot of employees. Solution: Tap into phantom shares UAE – cash payout depending on the Company’s share price. No shares are issued.  

• Foreign Ownership Workarounds  

In the Mainland, there are restrictions on the foreign ownership of some sectors. Solution: Free zones (DIFC/ADGM) offer SPVs, trusts, and nominees to hold shares on behalf of expats. Perfect for UAE employee equity incentives.​

• Accounting Impacts

ESOPs show as debt on books, affecting financials. Solution: Auditors review early. Phantom shares UAE simpler accounting. Check vesting schedules and cliffs’ impact.

Major Advantages of ‘Employee Stock Ownership Plans’ ESOPs in the UAE

• Equity Incentives Attract and Retain Top Global Talent.
• Offer shares instead of salaries and save cash for the startup.
• Cultivate a strong culture of ownership and collaboration.
• DIFC and ADGM free zones offer zero corporate tax benefits.
• Employee pays rewards at company sales or IPOs.
• Remote work improves motivation and loyalty through vesting.

Statistics and Trends

• 67% Adoption Rate Data

67% of MENA Startups in the UAE have a 4-year cycle with a 1-year cliff. After one year 25% gets unlocked, the rest gets unlocked each month. Standard schedule venting cliffs. Middle East and North Africa.

• CDR Report 2021

Sector Breakdown (Tech/AI leads)

• UAE Top Startups in Tech

ADGM stock option rules are at the forefront of Dubai’s tech startups.

Tech leads in the region. AI, finance, and life sciences follow. High-growth needs an ESOP pool for UAE startups.​

• Cash Equity Shift

Pre-2020: Phantom shares dominated. Now, equity vs. cash compensation favours real ESOPs post-100% ownership.

Cultural Adoption Startup Talent Retention Strategies

UAE workers need simple ESOP explanations. Equity is a new concept here. Use workshops, videos. Time grants after Ramadan. Build Trust with clear vesting schedules and cliffs communication.​

Vesting & Buyback Design

4-year vesting + 1-year cliff standard. Good leavers get a full value buyback. Bad leavers lose unvested shares. Fair rules keep the ESOP pool for UAE startups safe.​

External Administrator Use

Make use of what SPV Managers offer concerning DIFC ESOP regulations and let external auditors deal with the cap table and compliance, all while the lawyers work, ensuring there will be shareholder approvals for the ESOPs and this, in turn, will free the founders so they can continue with business scaling and developing.  

Specialised User Implementation Guide  

Five Steps of an Essential Legal Nature  

• Reserve ESOP Pool: allow for 5-15% of the shares with an upper limit of 10% new capital.
• Draft Documents: outlining the rules of the plan with respect to grant agreements, award letters, etc.  
• Shareholder Voting: 75% must approve and can do so via a special meeting  
• SPV/Trust Setup: free or quasi-free trade zone use with regard to foreign ownership.
• Auditor + ESCA Approval: to ensure compliance and for quarterly reports to be submitted.

Recommended Overall Structural Approach  

• 4 years with  12 months of cliff (67%  average).
• Good or bad, lever buybacks to protect the pool.
• Must exercise the option in a liquidity event (which can only be an IPO or sale).  
• Allow for phantom shares when dealing with an LLC (which will be subject to a 50-shareholder limit).

Our licensed business setup consultants in Dubai always welcome you for a streamlined process. They are the top recommended experts from PRO Services in Dubai with over 12+ years of experience, helping people with their Business setup. 

FAQs

Q1: How does an ESOP work in the UAE?  

ESOPs mean giving employees company stock rather than giving extra money. Employees get to be part owners and care more about the Company.  

Q2: What in the UAE needs to be done for ESOPs to be done legally?  

ESOPs are governed by Federal Decree-Law No. 32 of 2021. Enterprises usually need 75% of the Company’s shareholders to approve and an okay from the governing authority.  

Q3: What is usually the amount of equity that UAE startups keep for an ESOP?  

Startups keep 5-15% of the Company’s equity for an ESOP so employees can gain equity and feel more integrated as part of the family.  

Q4: What is a vesting schedule? What is the explanation for the popularity of the 4-year plan in the UAE?  

A vesting schedule is when employees are able to gain full ownership of shares at a certain time. The 4-year plan is common because there is a 1-year cliff and a reward for incentive for longevity and commitment to the Company.  

Q5: Why, more than having cash, do the startups in the UAE prefer ESOPs?  

Startups’ ESOPs allow employees to be more invested and committed to the Company. Employees get money and get a stake in the profit of the Company.

Conclusion

ESOPs offer UAE startups a smart way to reward teams with equity, following clear laws like Federal Decree-Law No. 32 of 2021. They build loyalty through vesting plans and save cash for growth in free zones like DIFC. Start using ESOPs today to attract top talent and drive your business forward.

Contact the experts from PRO Services in Dubai for more consultancy and legal approach!