Startups in the UAE are rapidly emerging as key players in the region’s innovation-driven economy. To sustain early-stage growth, founders often turn to equity financing by raising capital in exchange for ownership in the company. Among the most common forms are seed funding and series rounds (Series A, B, etc.). While these terms are widely used globally, structuring such rounds in the UAE involves specific considerations under the local legal and regulatory framework.
Understanding Seed and Series Rounds
Seed funding typically represents the first significant equity investment in a startup, used to develop a minimum viable product (MVP), conduct market validation, and build the founding team. Investors in this round are usually angel investors, friends and family, or early-stage venture capital funds.
Once the startup demonstrates traction, it may move on to Series A or subsequent funding rounds. These rounds involve more institutional investors and are used to scale the business by expanding operations, grow user base, and achieve profitability.
Corporate Structures and Regulatory Landscape in the UAE
In the UAE, the choice of corporate vehicle plays a crucial role in structuring equity financing. Most startups opt for incorporation in free zones, such as Abu Dhabi Global Market (ADGM) or Dubai International Financial Centre (DIFC), due to their common law framework, flexible shareholding structures, and investor-friendly regulations.
Mainland UAE companies, governed by the UAE Commercial Companies Law (Federal Decree Law No. 32 of 2021), offer limited flexibility in terms of issuing different classes of shares, although this is gradually evolving. Free zone jurisdictions, by contrast, allow startups to issue various share classes with differing rights related to voting, dividends, and liquidation preferences which are key tools in equity financing.
This blog is a part of our Choosing the Right Investment Instrument for Startups Blogpost.
Key Legal Considerations in Structuring Rounds
Share Classes and Preferences
In ADGM and DIFC, startups can issue preferred shares to investors with rights such as liquidation preference, anti-dilution protection, and drag-along/tag-along provisions. This is essential in series rounds where investor rights become more sophisticated. In other UAE jurisdictions, such flexibility is limited unless explicitly permitted by the relevant authority.
Shareholder Agreements and Term Sheets
A clear and detailed shareholder agreement is fundamental. It should set out investor rights, board composition, exit mechanisms, and founder obligations. Term sheets, although non-binding, act as a roadmap for the transaction and help align expectations before legal documents are finalized.
Valuation and Equity Dilution
UAE startups often face challenges in arriving at valuations due to the nascent stage of the market. Convertible instruments such as SAFE (Simple Agreement for Future Equity) or convertible notes are becoming increasingly popular in seed rounds as they defer valuation to the next priced round.
Foreign Investment and Ownership
With the introduction of the 100% foreign ownership regime in many sectors of mainland UAE, foreign investors now have more flexibility. However, due diligence is necessary to confirm sector-specific restrictions or licensing conditions.
Regulatory Filings and Compliance
Free zones like ADGM and DIFC require proper filings of share issuances, board resolutions, and amended articles of association. Non-compliance could result in regulatory penalties or delays in future fundraising.
Evolving Ecosystem and Investor Confidence
The UAE’s startup ecosystem has matured significantly, with increased participation from venture capital firms, government-backed accelerators, and sovereign wealth funds. Initiatives like Hub71 (Abu Dhabi) and Dubai Future District are actively supporting early-stage innovation. These developments have boosted investor confidence and made equity financing more accessible.
However, founders must approach equity financing with a clear strategy—balancing growth capital needs with long-term control and dilution considerations. Engaging qualified legal and financial advisors familiar with the UAE regulatory environment is key to navigating these complexities.
Conclusion
Equity financing through seed and series rounds offers a powerful route for startups in the UAE to scale and attract strategic partners. By structuring their financing rounds in compliance with local regulations and market practices, especially within jurisdictions like ADGM and DIFC, founders can create a strong legal foundation for sustainable growth and investor engagement.
