Ahmed Elnaggar, founder and managing partner of Elnaggar & Partners/Image: Supplied
The UAE has become one of the world’s top destinations for startup founders and investors, thanks to welcoming policies, strong regulations, and global market access. But alongside the opportunities, many first-time entrepreneurs face seasoned investors who know exactly how to structure deals in their favour
As founder and managing partner of Elnaggar & Partners for Legal Consultation and Corporate Services, and having established the Emirates Legal Network Association, I witness this dynamic daily across the UAE’s thriving startup ecosystem. Too many founders rush into agreements, whether shareholder contracts, employment deals, convertible notes, or acquisition agreements, without fully understanding the legal implications hidden in complex clauses.
Whether you’re signing a shareholder agreement, an employment contract, a convertible note, or an acquisition deal, here are five critical clauses every startup founder must master before putting pen to paper or as we all do now, clicking that electronic signature button.
1. Your exit strategy: Plan your exit route before you need it
Every business relationship begins with a promise, just like the first bite of a meal. Startup founders often focus on opportunities but rarely ask: what happens when it ends?
A weak exit clause can trap you in a bad deal, force a loss-making sale, or even drag you into legal disputes. In the UAE’s fast-moving startup scene, this is far from hypothetical.
In Mergers and Acquisitions, exit terms decide if you leave rewarded or regretful. Drag-along rights, tag-along rights, and put/call options determine who controls the process and on what terms. If these terms are unfamiliar, it’s time to seek guidance.
The golden rule: You have to know your exit from day one. As Ahmed Tarek said on Shark Tank Egypt: “You don’t have to exercise it, but you must have it.” Define how partnerships end, how disputes are managed, how shares can be sold, and what happens if investors cash out before you do.
2. Valuation and dilution: When your ownership evaporates
Seasoned investors often structure deals that look appealing at first but gradually shift control and ownership away from founders. First-timers are the easiest targets.
Convertible notes are a classic example. Hidden terms, valuation caps, discounts, or equity triggers can quietly tip the balance. Anti-dilution clauses pose another risk, allowing investors to protect themselves at your expense during future funding rounds.
History offers a cautionary tale. Facebook’s early co-founder, Eduardo Saverin, saw his stake fall from over 30% to under 10% after signing documents that stripped his pre-emptive rights. A single clause enabled Zuckerberg and others to issue new shares without him.
The lesson is simple: never sign incorporation or shareholder agreements without securing strong pre-emptive rights and modelling the impact of future share issuances. Every word matters. Understand how terms play out in both best- and worst-case scenarios before you commit.
3. Control and voting rights: When majority ownership means nothing
Too often, founders sign deals only to realize they’ve lost control of their own companies. The harsh truth: majority ownership doesn’t always mean real power.
Investors and their lawyers frequently embed protective provisions that give them veto rights over key decisions: hiring executives, budgets, fundraising, and even product strategy. You might own most of the company yet be powerless to rebrand, expand, or pivot. Acquisition agreements can also lock you into restrictive commitments long after the deal closes.
Steve Jobs learned this lesson the hard way. Despite being Apple’s co-founder and visionary, he was sidelined when the board backed CEO John Sculley. Without protective voting rights, Jobs was effectively stripped of control.
Remember this crucial lesson: majority shareholder stake does not automatically equal control. Without protective governance rights, even founders can be sidelined by their own boards. Make sure you understand completely whether you’re selling shares of your company, accepting investment, or surrendering even partially your decision-making powers. Ensure all strategic controls remain aligned with your vision.
4. Non-compete and restrictive covenants: The career-killing clauses
This represents one of the most overlooked yet dangerous contractual elements. You might believe you’re simply signing an investment deal, but buried within could be a clause that prevents you from building your next startup. Non-compete clauses can be drafted so broadly that you’re effectively locked out of your entire industry for years.
If these clauses aren’t drafted fairly, you could find yourself stuck in a partnership where your partner is freely competing, growing, or expanding elsewhere while you’re restricted by legal force. The same principle applies to your employees who sign employment contracts without proper non-compete clauses protecting your company when they decide to leave, taking with them the wealth of training, knowledge, ideas, and contacts you’ve invested in building.
Non-solicitation terms and provisions can prevent you from working with your own team or client base if relationships deteriorate and you’re the one forced to leave your company. Imagine spending years building networks, relationships, and sometimes genuine friendships while pursuing your entrepreneurial dream, only to sign a document that places legal limitations on your professional, business, and personal connections.
Always negotiate specific time limits, geographical definitions, and carefully narrow or expand the definition of “competition” when it’s applicable and beneficial for you. Otherwise, you risk signing away your future ideas and innovations.
5. Dispute resolution: Choosing your legal battlefield wisely
Nobody enters a deal expecting conflict. Fatima BalFaqeeh said on The Jurist Podcast: “It’s always beautiful to witness the start of an enterprise, but envisioning worst-case scenarios early is one of the most crucial steps. Involving a legal professional makes it easier for everyone and removes the awkwardness.”
I couldn’t agree more. It’s far wiser to have tough discussions up front than to face costly battles later. That’s why the dispute resolution clause is critical, it dictates where, how, and under which laws conflicts will be resolved.
Being forced into litigation abroad can be crippling, draining time and resources. Thankfully, the UAE offers strong options: advanced civil law courts, two common law free zone courts, world-class arbitration centers, and structured mediation frameworks. Each has its advocates, but the key is ensuring your clause is enforceable and aligned with best practices.
Bottom line: choose a dispute forum you can both afford and trust.
Read: Building with confidence: The impact of Dubai’s new Contractors Law
The reality check every founder needs
The UAE offers incredible opportunities for startup founders, but one poorly drafted clause or contract can waste years of dedicated hard work. Don’t misunderstand, investors aren’t always predators, but they are always more experienced than founders, especially first-time entrepreneurs. As we’ve all learned through experience (or what some learn the hard way), business is business.
Before signing any contract, ask yourself these five critical questions: Where’s my exit strategy? How will this affect my future ownership? Who controls the business after signing? Am I signing away future opportunities? If things go wrong, where and how will I handle disputes?
If you can clearly answer all these questions, you’re positioned for success. If not, you need to seek experienced legal counsel before putting pen to paper or clicking that electronic signature button.
