ESOPs in MENA Startups: What Founders and Employees Really Need to Know
Employee Stock Option Plans (ESOPs) have become an increasingly critical part of the startup toolkit in the MENA region. Founders and early employees alike should understand how ESOPs work, what terms to look out for, and how equity can translate into future value. This comprehensive guide breaks down the essentials of ESOPs, from basic definitions to the fine print of vesting, exercising, and exit scenarios, all tailored to the context of early-stage startups in the Middle East and North Africa.
What Are Share Options, and How Do They Differ from Shares?
What Are Share Options, and How Do They Differ from Shares?
Share options (or stock options) give an employee the right to purchase shares of the company in the future at a predetermined price (the strike price), rather than granting actual shares upfront. If certain conditions are met (like staying with the company for a set time), the employee can exercise the option to buy shares at the strike price, even if the market value of those shares has increased. In contrast, owning a share means you already hold equity (stock) in the company with associated rights (voting, dividends, etc.) from day one.
Why Early-Stage Startups Offer ESOPs
In a startup’s early days, cash is tight and salaries fall below corporate levels. ESOPs allow startups to compensate and motivate employees with ownership upside instead of high salaries. By giving team members a stake in the company’s future success, employees and founders know that everyone wins if the company grows and its equity becomes valuable.
How ESOPs Work: Option Pools and Vesting Schedules
To implement an ESOP, a startup sets aside a portion of its equity into an option pool. This is a block of shares reserved specifically for employee (and sometimes advisor or consultant) equity grants. When you hear that a company “has an ESOP of 10%,” it means 10% of the company’s shares are allocated to be granted as stock options to current and future team members.
What Are Share Options, and How Do They Differ from Shares?
What Are Share Options, and How Do They Differ from Shares?
Share options (or stock options) give an employee the right to purchase shares of the company in the future at a predetermined price (the strike price), rather than granting actual shares upfront. If certain conditions are met (like staying with the company for a set time), the employee can exercise the option to buy shares at the strike price, even if the market value of those shares has increased. In contrast, owning a share means you already hold equity (stock) in the company with associated rights (voting, dividends, etc.) from day one.
Why Early-Stage Startups Offer ESOPs
In a startup’s early days, cash is tight and salaries fall below corporate levels. ESOPs allow startups to compensate and motivate employees with ownership upside instead of high salaries. By giving team members a stake in the company’s future success, employees and founders know that everyone wins if the company grows and its equity becomes valuable.
How ESOPs Work: Option Pools and Vesting Schedules
To implement an ESOP, a startup sets aside a portion of its equity into an option pool. This is a block of shares reserved specifically for employee (and sometimes advisor or consultant) equity grants. When you hear that a company “has an ESOP of 10%,” it means 10% of the company’s shares are allocated to be granted as stock options to current and future team members.
Market insights show that a 10-12% ESOP is a common benchmark for the region.
Vesting schedules are the mechanism that governs when employees actually earn the right to exercise their stock options. Nearly all ESOP grants come with a vesting schedule to encourage employees to stay with the company. The standard in most startups globally, and indeed in MENA, is a 4-year vesting period with a 1-year “cliff” and monthly vesting thereafter. This means if an employee stays for four years, they will vest 100% of their options. However, there is a one-year cliff: during approximately the first 12 months, none of the options vest at all. At the one-year mark, 25% of the total grant vests in one go (as if “catching up” the first year), and after that, the remaining 75% vests in incremental monthly portions over the next 36 months. By the end of year four, the employee has vested 100%. If the employee leaves before the 1-year cliff, they leave with nothing, the options expire unvested.
Carta’s data shows that in the Middle East, 67% of startup equity grants follow a four-year vesting/one-year cliff structure.
Evaluating the Real Value of Your Equity Offer
Stock options have no guaranteed value today. They only matter if the company exits above your strike price.
What you need to know to price it
To assess an equity offer, you need a short checklist of inputs:
How the math works
Stock options have no guaranteed value today. They only matter if the company exits above your strike price.
What you need to know to price it
To assess an equity offer, you need a short checklist of inputs:
- Number of options granted (e.g. 10,000)
- Strike price (what you pay to buy each share, e.g. $1)
- Fully diluted share count (total shares if everything converts)
- Expected exit valuation (best-case, base-case, worst-case)
- Future dilution (new rounds will reduce your percentage)
- Tax treatment (jurisdiction-specific, often material, UAE is a tax-neutral environment)
How the math works
- Work out your ownership: If you hold 10,000 options in a company with 10,000,000 fully diluted shares, you own 0.1% on paper.
- Model the exit: If the company exits at $500M and you still hold 0.1%, your stake is worth $500k.
- Subtract exercise cost (10,000 × $1 = $10k).
- What remains (before tax, if applicable) is your upside.
- If the exit is smaller, the upside shrinks. If the exit is below the strike, the options are worth zero.
- Factor in dilution: It’s almost certain the company will issue more shares in the future (through fundraising or expanding the option pool). That means your percentage ownership will shrink. For early-stage employees, it’s prudent to assume a hefty dilution by the time of exit, e.g. your 0.1% now might end up being half that (0.05%) after multiple rounds. Carta’s data suggests early employees at a pre-Series A company might see their stake diluted by 30–50% through subsequent fundraises. In contrast, if you join a later-stage startup that’s mostly done raising (say at Series C), future dilution might be on the order of 10–20%.Adjust your ownership stake in your model accordingly.
Quick tip:
Always ask what percentage of the company your grant represents on a fully diluted basis. 10,000 options sounds great, but it’s very different if the company has only 100,000 shares (you’d have 10%) versus if it has 100 million shares (you’d have 0.01%). Many employers will include the percentage in the offer, but if not, don’t be shy about asking, it’s crucial context to value the offer.
How Exercising Stock Options Works (and Why It Matters)
Exercising an option means you choose to purchase the underlying shares at the strike price. Only once you exercise do you actually become a shareholder. You typically cannot sell the option itself, you first exercise (buy the shares), then you can hold or sell the shares if there’s a market for them. Understanding when and how to exercise your options is extremely important for employees, because it involves a financial commitment.
Key points about exercising stock options:
Exercising an option means you choose to purchase the underlying shares at the strike price. Only once you exercise do you actually become a shareholder. You typically cannot sell the option itself, you first exercise (buy the shares), then you can hold or sell the shares if there’s a market for them. Understanding when and how to exercise your options is extremely important for employees, because it involves a financial commitment.
Key points about exercising stock options:
- You can only exercise vested options. Vesting is the prerequisite, any unvested portion cannot be exercised. Once vested, you usually can exercise at any time up to the expiration date of the option.
- Exercise requires paying the strike price. When you exercise, you must pay the company the strike price multiplied by the number of options. Nominal exercise prices are common in the UAE, particularly for early-stage startups and initial ESOP grants. As companies scale, practice shifts. Later-stage and larger companies tend to price options at or near fair market value at grant.
- Timing: When can or should you exercise? Exercise is a cash and risk decision. Many employees wait for a liquidity event (IPO or acquisition) and use a same-day exercise-and-sell to avoid paying out of pocket. Exercising earlier means locking cash into an illiquid asset.
Practical advice:
Read the plan documents carefully. Exercise rights are often subject to strict timing windows, expiry rules, and no accumulation, miss the window, and the options lapse.
If you’re UAE-based, things are straightforward: no personal income or capital-gains tax on exercising or selling options. Most plans run through ADGM or DIFC, the UAE’s common-law hubs, which are built for ESOPs. If the company is offshore (Delaware, BVI), expect extra admin and filings. If you move to, or already live in, a taxed MENA country (like Saudi Arabia or Egypt), pause and reassess. Exercising or selling may trigger local tax, especially if the company isn’t locally incorporated.
Good Leaver vs. Bad Leaver: What Happens if You Leave?
How you leave a startup can decide whether you keep your equity, or lose it entirely.
Most ESOPs classify people as either “good leavers” or “bad leavers”.
Good Leaver vs. Bad Leaver: What Happens if You Leave?
How you leave a startup can decide whether you keep your equity, or lose it entirely.
Most ESOPs classify people as either “good leavers” or “bad leavers”.
- A good leaver is someone who leaves on good terms, usually due to a voluntarily resignation. Generally, you can expect that if you leave on decent terms (voluntarily after your cliff, or are laid off), you keep any vested stock options and you lose any unvested options.
- A bad leaver is someone who is fired or quit on bad terms, due to misconduct, breach of contract, or anything that damages the business. In some plans, even resigning before hitting a defined milestone (like two years in) might put you in the “bad” bucket.
Why it matters: If you’re labeled a bad leaver, you could lose everything, even vested options. Good leavers usually keep what’s vested, and some plans even extend the exercice window as a gesture. But it all depends on what’s written.
Conclusion
In conlusion, when signing on, an employee should ask a few key questions about the ESOP beyond just leaver status.
ESOP due-diligence checklist (keep it tight):
Asking these questions not only provides you with important information but also signals to the employer that you are an informed candidate who values equity, which is positive.
Follow us on LinkedIn : in one of our future articles, we will explain your cash-out strategies in more detail – IPO, acquisition, and secondary sales (which are gaining popularity).
DISCLOSURE: This article is solely for educational purposes and is not intended to provide, and should not be relied upon as, tax, legal, accounting, or investment advice. The information provided does not take into account your specific circumstances, and you are strongly advised to consult with your own professional advisors before making any decisions or taking any action. Seed and Scale does not assume any liability for reliance on the information provided herein.
If you’re negotiating or reviewing an ESOP agreement in MENA, ask if the plan defines good vs. bad leavers and how each scenario is treated. For example, you could ask: “If I resign, do I retain my vested options and what is the exercise window? If I’m laid off not for cause, can I keep my vested shares?”
Conclusion
In conlusion, when signing on, an employee should ask a few key questions about the ESOP beyond just leaver status.
ESOP due-diligence checklist (keep it tight):
- What is the instrument? Options (ESOP) or something else?
- How much equity? Number of shares and fully diluted % of the company.
- Strike price? How set, FMV (Fair Market Value) or nominal? What will it cost to exercise?
- Vesting terms? Schedule and cliff (standard or custom).
- Post-termination window? 90 days or extended?
- Leaver rules? Can vested equity be lost?
- Exit treatment? Vesting on acquisition (Acceleration)? Ability to sell?
- Performance conditions? Pure time-based or milestone-linked?
Asking these questions not only provides you with important information but also signals to the employer that you are an informed candidate who values equity, which is positive.
Follow us on LinkedIn : in one of our future articles, we will explain your cash-out strategies in more detail – IPO, acquisition, and secondary sales (which are gaining popularity).
DISCLOSURE: This article is solely for educational purposes and is not intended to provide, and should not be relied upon as, tax, legal, accounting, or investment advice. The information provided does not take into account your specific circumstances, and you are strongly advised to consult with your own professional advisors before making any decisions or taking any action. Seed and Scale does not assume any liability for reliance on the information provided herein.