The rise of ESOPs in the UAE: A shift from cash to equity

This article was co-created by the Carta team and law firm Simmons & Simmons.

For years, private companies in the United Arab Emirates (UAE) have structured their employee compensation models around cash-based incentives—such as phantom share schemes or profit-sharing pools—to attract and retain top talent. However, as the startup ecosystems in the region evolve and competition for talent intensifies, equity-based rewards such as employee share ownership plans (ESOPs) are gaining traction. 

The popularity of cash compensation in the UAE

Until 2020, the Federal Law on Commercial Companies (2015) required onshore businesses to be at least 51% owned by UAE nationals, limiting their ability to increase share capital for equity-based compensation. These restrictions discouraged foreign-owned companies from setting aside a pool of equity for employees, making cash-based incentives the more practical and widely used option.

However, the amendments published to the Commercial Companies Law in 2020 allow for 100% foreign ownership of UAE businesses carrying out an ‘approved’ activity—as determined by the local Department of Economic Development (DED).

While cash-based schemes remain popular in well-established and multinational corporations, especially where the workforce is predominantly UAE residents, many startup founders are looking for new ways to incentivize sought-after employees.

The shift towards ESOPs

In recent years, there has been a significant rise in the number of private companies in the UAE offering ESOPs to select employees as part of their wider compensation strategy. This trend is especially noticeable in high-growth sectors—such as tech, life sciences, engineering, finance and AI—where capital investment and competition for talent are high.

Part of the reason for this shift is the UAE’s emergence as a leading business hub, offering a healthy investment landscape, easy access to funding, and tax-efficient policies. As a result, more international companies are expanding into the region and beginning to shape employee compensation trends. Plus, professionals who have previously worked at companies that offer equity now expect similar benefits from local startups. 

In order to compete with the high salaries and equity incentives offered by international companies, local founders are turning to ESOPs as a way of attracting and engaging talent. As the region’s venture landscape continues to evolve and businesses adapt to easing of foreign ownership restrictions, ESOPs are likely to become even more prevalent.

Equity vs. cash

Unlike cash-based incentives, which provide short-term financial rewards, ESOPs offer employees an ownership stake in the company, aligning their interests with long-term business success. ESOPs are particularly beneficial for early-stage startups that need to conserve cash, because granting equity enables them to hire and retain employees without high upfront salary costs. 

Furthermore, while most cash-based schemes have a direct or indirect cap on the maximum cash payout, ESOPs are limited only by the company’s growth value and a successful exit. This means that both the potential upside and risks can be significantly higher with equity than cash incentives.

ESOP structures

When it comes to setting up an employee share ownership plan, there’s no one-size-fits-all approach. ESOPs are relatively flexible and can be structured to reflect the commercial and strategic objectives of the business. 

When designing an ESOP, it’s important to consider:

• Eligibility: Is scheme participation limited to employees, or can contractors and other advisors also receive equity?

• Award structure: Should awards be granted as conditional rights to acquire shares, or as share options?

• Vesting: Will the vesting criteria be time-based, performance-based, or a combination of both?

• Share acquisition: Can shares only be acquired upon an exit (e.g. a company sale or IPO) or under other circumstances?

• Liquidity: If shares can be acquired at times other than an exit, should a put and call option be implemented to ensure liquidity?

• Leaver treatment: Should participants retain the rights to acquire shares after leaving the company, and under what conditions?

Download ESOP templates

Ready to set up an ESOP? Carta has teamed up with Simmons & Simmons to provide several document templates to help you structure and plan for an employee equity scheme in the UAE.

Templates included in the download:

1. Share Option Agreement with time vesting schedule

2. Share Option Agreement with performance schedule

3. Draft Notice of Exercise