Smart Equity Sharing in the UAE: Phantom ESOPs vs. Holding Companies

Smarter Equity Sharing for UAE Start-ups

Introduction: Rewarding Talent Without Surrendering Control

Building a start-up in the UAE is not just about capital—it's about people. Retaining the right team often hinges on offering more than just a pay check. But in a jurisdiction like the UAE, where traditional shareholding structures are tightly regulated, the question arises: how do you offer equity-linked incentives without complicating your ownership or triggering regulatory friction?

The answer lies in two forward-looking strategies: Phantom ESOPs and Holding Company models. Both allow you to link compensation to performance and valuation, but with very different mechanics and implications. Choosing between them isn’t just a legal decision—it’s a strategic one.

Understanding the Legal Landscape

The UAE doesn’t currently offer a comprehensive legal framework for employee stock options the way some common law jurisdictions do. What that means is: start-ups operating here need to navigate within the existing commercial and civil legal boundaries—and be particularly cautious when structuring anything that looks like a share transfer.

At the heart of the issue is this: UAE courts do not generally enforce side agreements that purport to transfer shareholding unless they are reflected in the company’s official documents, such as the Memorandum of Association (MOA) or share register. So if you’re promising shares informally, or through off-the-record arrangements, you're taking a legal and operational risk.

That’s where Phantom ESOPs come in as a smart workaround. Since these do not involve issuing actual shares, but rather promise a cash equivalent based on valuation or performance milestones, they fall within the scope of contractual entitlements—not corporate governance. This makes them enforceable under UAE contract law, provided they are clearly drafted and well-executed.

Phantom ESOPs: Equity-Like Incentives Without Ownership Transfer

A Phantom ESOP is essentially a bonus plan, structured to mirror the economic benefits of shareholding without altering the company’s capital structure. Employees don’t receive real shares, nor do they become shareholders. Instead, they are granted units or “phantom shares,” which vest over time or on the achievement of specific milestones. Upon a liquidity event (e.g., company sale, IPO), they receive a cash payout equivalent to the value of those phantom units.

This model works well in the UAE because:

• It doesn’t require changes to the MOA

• It avoids the regulatory limitations around share classes

• It protects the founder’s equity and control

Most importantly, it gives employees a meaningful stake in the company’s financial success, without granting governance rights or legal ownership.

Holding Companies: Structuring Real Equity Through a Parent Entity

For companies preparing for investment rounds or seeking to issue real shares to employees, a holding company model may be more appropriate. In this structure, a parent entity—often incorporated in a jurisdiction that permits multiple classes of shares and more flexible governance—is created to own the operating business.

Employees can then be issued equity through this holding company, with clearly defined rights, restrictions, and exit terms. Jurisdictions like ADGM, DIFC, and RAK ICC allow the creation of non-voting or restricted shares, making it easier to separate economic interest from control.

However, this model comes with complexity:

• Additional regulatory compliance

• Cross-entity legal coordination

• Investor due diligence on both the holdco and opco

If done right, it offers a long-term framework for equity distribution, particularly for companies that plan to scale or exit in the medium term.

What Happens on Exit or in a Dispute?

One of the most valuable features of a Phantom ESOP is how it plays out during a liquidity event. When the company is sold or acquired, the value of the business is assessed, and phantom shareholders receive a pre-agreed payout based on that valuation.

If there’s a dispute over ownership or valuation, phantom holders don’t get involved in governance disputes—they simply exercise their rights under the contract. This makes resolution faster and cleaner than traditional shareholder disagreements.

The key is to draft clearly:

• Define valuation methods

• Set payout triggers

• Include dispute resolution clauses (preferably arbitration or UAE court jurisdiction)

When structured properly, phantom ESOPs avoid many of the legal bottlenecks that often arise in equity-based conflicts.

Are Phantom Shares the Same as Bonuses?

Not quite. While both are performance-linked, phantom shares are tied to the growth and valuation of the company, often with vesting periods and long-term incentives. Bonuses, on the other hand, are typically short-term, discretionary, and linked to individual KPIs.

Here’s a quick comparison:

Feature	Phantom ESOPs	Employee Bonuses
Purpose	Long-term value alignment	Short-term performance reward
Vesting	Yes (time or performance-based)	Usually not
Ownership Rights	None	None
Tax in UAE	Not taxable for UAE residents	Not taxable for UAE residents
Legal Form	Contractual entitlement	Salary component

How Juris Maestro Can Support Your ESOP Journey

At Juris Maestro, we help founders structure equity-sharing models that work—legally, commercially, and strategically. Whether you're considering a phantom ESOP to motivate your core team or exploring a holding company setup for international investors, we ensure your framework is sound, scalable, and investor-ready.

Our advisory includes:

• Custom drafting of Phantom ESOP agreements

• Legal setup of holding companies

• Review and amendment of MOAs and share structures

• Guidance on compliance, employment, and dispute planning

Conclusion: Equity Sharing Done Right

Equity isn’t just about shares—it’s about trust. In the UAE, founders can reward talent without relinquishing control, as long as the structure is thoughtfully designed. Phantom ESOPs offer simplicity and flexibility; holding companies offer robustness and scalability. The right choice depends on your growth stage, regulatory environment, and long-term vision.