Shareholder Agreements – Startups in Kuwait

Attorney Fajer Ahmed

The startup scene in Kuwait has really taken off. We have a lot of talent, creativity and independence in Kuwait but also the legal and economic system in Kuwait has changed in the past few years. The rise in the number of local startup businesses is also because of the Kuwait National Fund, a fund in Kuwait that provides funding, training and resources for startups and small to medium businesses in Kuwait. They have helped kickstart many successful projects in Kuwait in a wide range of sectors.

There is also the Kuwait Business Center that aims to assist small businesses with obtaining a license in a simple manner, allowing them to apply online. Also KDIPA is playing an important role shifting our economic system encouraging foreign investments in Kuwait. This is all great, but there are other issues that startup owners and partners have to deal with and that require the guidance of a lawyer.

Although there is a lot of positive changes the legal system still has a long way to go for it to be startup-friendly. There are still no commercial licenses in Kuwait for “mobile applications” even though there are many tech startups in Kuwait. There are also many rights that startups or founders of startups need that are not available to them and cannot be included in the shareholders agreement or articles of association of a company, that may otherwise be available in other countries that are startup friendly, such as the BVI.

Question
We are starting a company made of three partners. My partner will be working for his shares while the other partner and I will be investing in the company. I tried explaining this to the Ministry of Commerce to register a company, but they needed us to all transfer amounts to a bank account, paying for our shares. Can you please explain what we can do to protect each party and to have a fair shareholding agreement?
Attorney Fajer
There is more than one thing to think of in this situation. The team is one of the most important assets you have, so it is important to understand where everyone is coming from and their role in the company.
One thing to look out for with sweat equity is a vesting schedule. [Sweat equity is the contribution made to a project or enterprise by one or more key members in the form of effort and work]. A vesting schedule is when you receive stock for every month or milestone you have worked. This is important because you then make sure that the partner is working for the percentage, instead of getting it at the beginning.

There are many other clauses to look at in a shareholders agreement that I won’t discuss here, as I mentioned above in Kuwait we keep using a very general shareholder agreement, that doesn’t seem to discuss many shareholders issues and definitely doesn’t protect investors that depend on sweat equity for the company to continue running. I hope we continue to see changes in Kuwait soon in the legal system to help protect both investors, founders and employees in startups.

For more questions or comments, email: info@ftl-legal.com

By Attorney Fajer Ahmed

This article was published on 02/04/2018