In this post I'm going to share what I've learnt about incorporating a startup in the UAE. Over the past year, I've spent some time figuring out the cheapest, quickest, and ideally most flexible way for a startup to get off the ground and I thought it would be valuable for others in the same boat.
I'd like to preface this with I am not a lawyer and this is not legal advice. Everything here is retold tales from my experience trying to start a startup in Dubai.
The best reason to incorporate your startup is to allow your company to conduct business in the UAE.
Limiting your liability
You probably want to register as a Limited Liability Company. This limits the liability of the partners in the company to the total assets owned by the company in case something bad happens. It's worth noting that in theory this is great, but it doesn't give you a blank cheque to run your business poorly. An example would be that in the UAE directors are directly liable for any cheques that bounce.
I won’t go too much into this, but if you are starting a company with someone it’s always a good idea to make your shares in the company vest over time. Here’s a quote paraphrased from Peter Thiel’s Startup Class that explains it well:
How the equity you give people vests over time is key. You don’t want to grant it all at once, since then they could just get it and leave. The standard is to have it vest over 4 years, with 25% vesting at a 1 year cliff, and then with 1/48th vesting each month for the 3 years after that. This means that if people don’t work out before putting in a whole year, they get no equity. Often you still give them the fraction they earned, so long as they didn’t cause a bunch of trouble. But once they’re there a year, they have their 25% and the rest accrues gradually.
Founders need vesting schedules too. It’s not ideal to have founders who are fully vested from the outset. One founder might decide to quit. If he’s fully vested, the co-founder would be stuck working for 2 people.
A UAE trade license
Alright, now that we know we need to incorporate to get our trade license, let’s look at how it can be done.
Incorporating in a free zone
If you’re an online platform selling goods or services and do not require a retail outlet, you want to be registered in a free zone as an FZE or FZCO (Free Zone Establishment or Free Zone Company - the difference being how many shareholders own the company, FZE only 1 and FZCO 2+).
Why? FZ companies can be owned 100% by foreign nationals (i.e. no local sponsor required), are tax exempt, and benefit the owners with a residency visa. Win, win, win.
The other option is registering a non-free zone LLC with the DED and this requires finding a local UAE sponsor. If you plan on selling goods or services through a retail store, for example, if you plan on opening a grocery store or a show room for your awesome new electric car company, you may want to read up on registering a company with the DED.
Now where can I register my FZCO
Dubai has many free zones and each its own upsides and drawbacks. Most startups and internet companies will register at Dubai Internet City, Dubai Silicon Oasis, or Jumeirah Lake Towers.
It's very expensive to register a company going solo (ballpark ~40k AED per year) and not every startup can afford to start in the red.
Incubators and accelerators
The cheapest place to register an FZ in the UAE is at an incubator or accelerator, the difference between the two being quite substantial. There are a few in Dubai worth considering and my good friend Abdullah from fishfishme does a nice job of comparing the them. There are a bunch popping up every week so make sure the one you join offers to help you register your startup as some may not be affiliated with a free zone.
I have applied to both In5 and DTEC so I will share my experience with these two.
In5 is just older than a year now and has a selection cycle every few months for startups that apply online. It's a lively atmosphere for startups in Knowledge Village and the trade license can be completed in under 2 months of your join date (although there have been cases where it has taken longer).
Approximate cost per year (including office space): 13k AED
DTEC is the new kid on the block and has planned to open in February 2015. They have already started accepting applications for their flexidesk option and within 3 weeks of join date the trade license can be issued.
Approximate cost per year (including office space): 15k AED
A company can also be registered in the Emirate of Fujairah using an incorporation consultant (Creative Zone and Virtuzone are the incumbents). This is usually the fastest way of getting your trade license because the only requirement is upfront capital. The trade license can be issued in 7-10 days but know that the activities are limited to consulting services and you may encounter problems when offering services in Dubai (of what I'm told).
Approximate cost per year (including a virtual office space and maybe a secretary): Virtuzone 17k AED, Creative Zone 35k AED
A big problem for startups
UAE trade licenses are not flexible, especially for high-growth, investor-hungry startups.
Startups move quickly. When you decide to bring in a new founder, hire your first employee, or sell shares to your friends, family, angel investor, or VC, you may run into some serious problems with a UAE trade license because of it's lack of flexibility.
Many companies in the UAE have found a solution by registering an offshore company in the US or in the British Virgin Islands as a holding company. The process is relatively simple:
This would allow you to perform any company restructuring at the holding company's level, which is relatively easier and cheaper. The process goes something like this:
- register UAE FZE (1 shareholder)
- register offshore holding company
- attest documentation from the holding company from BVI/US all the way through to the UAE MoFA (here's how)*
Note: This takes weeks and will cost close to $1,000 on top of the offshore company registration.
It comes down to the price you want to pay and how quickly you want to get setup. A trade license in the UAE is essential to your operation and incubators will offer you a very nice package if you are willing to wait. Registering an offshore holding company will benefit you in the long run, but you can probably wait for your startup to grow before thinking about it.
Cover photo credit to Asim Bharwani