Restrictive covenants for founders in UAE venture capital transactions: a practical guide to enforceability across three regimes
Mohammed Tartir
Senior Counsel
Alex Vromans
Associate
In the UAE's rapidly evolving venture capital landscape, restrictive covenants have become central to founder-investor relationships. As the region positions itself as a 'leading hub' for technology startups and venture investment, the legal frameworks governing post-investment founder obligations have gained critical importance.
Restrictive covenants, including non-compete, confidentiality, and non-solicitation provisions within employment contracts, serve as essential protective mechanisms in VC transactions.
Investors deploying capital into early-stage companies face unique risks, including:
- Founders retaining operational control of the business.
- Founders possessing intimate knowledge of proprietary technology and business strategies.
- Founders maintaining relationships with key employees, customers, and future investors.
While there may be additional contractual means to govern non-compete and non-solicitation provisions, this article focuses on the enforceability of these restrictive covenants in the employment context.
The UAE's multijurisdictional legal landscape adds complexity.
Founders and investors must navigate three distinct regulatory frameworks:
- The onshore UAE civil-law system governed by Federal Decree-Law No. 33 of 2021 on the Regulation of Labour Relations (the UAE Labour Law) together with its Implementing Regulations.
- The common-law framework of the Dubai International Financial Centre (DIFC) under Employment Law No. 2 of 2019.
- The Abu Dhabi Global Market (ADGM) regime under the Employment Regulations 2024. Each framework applies different enforceability tests, creating both opportunities and pitfalls for transaction structuring.
Types of restrictive covenants in founder arrangements
Comparative enforceability across three frameworks
Other free zones: federal law with administrative variations
Save for DIFC and ADGM, the other free zones in the UAE generally apply the UAE Labour Law as their substantive legal framework. However, these zones may maintain internal dispute resolution mechanisms or administrative procedures creating procedural variations. While substantive enforceability standards mirror onshore UAE requirements, some free zones operate employment dispute panels or arbitration centres handling initial claims before matters proceed to UAE courts.
Criminal liability for 'breach of confidentiality' applies in all UAE jurisdictions
Breach of confidentiality obligations, however, may attract criminal liability under the UAE Penal Code, and this exposure extends across all UAE jurisdictions including DIFC and ADGM where disclosure of trade secrets or confidential business information occurs without authorisation.
Practical drafting and enforcement considerations
A critical challenge in VC transactions is harmonising restrictive covenants across multiple documents – employment agreements, shareholder agreements, investment agreements, and founder vesting schedules. Inconsistencies create enforcement gaps and litigation risk.
Best practice requires explicit cross-referencing and alignment. The employment agreement should acknowledge the founder's shareholder status and confirm that restrictive covenants survive termination. The shareholder agreement should incorporate employment-based restrictions and tie them to equity vesting and exit provisions. Investment documentation should condition funding on the execution of compliant employment and shareholder agreements.
Common enforcement obstacles include ambiguous scope (vague definitions of 'competitive activities' or 'confidential information'), missing governing law and jurisdiction clauses, excessive duration or geographic reach, and lack of differentiation between founders based on role and access to sensitive information.
Effective restrictive covenants should tier restrictions by role and risk, include clear carve-outs for existing investments and personal projects, link to vesting and exit rights, specify remedies including liquidated damages and equity forfeiture, and address multijurisdictional scenarios for founders working across Emirates or internationally.
Common pitfalls in VC-stage documentation
The most frequent error is misalignment between employment agreements, shareholder agreements, and investment documentation. For example, an employment agreement may impose a 12-month non-compete while the shareholder agreement references 24 months, creating enforcement uncertainty.
Overly broad or perpetual restrictions, such as prohibiting founders from 'any business activity' in 'any technology sector' for 'indefinite periods' are virtually unenforceable in all three UAE frameworks. Courts in DIFC and ADGM may apply the 'blue pencil' doctrine (or severability) to sever unreasonable portions, but onshore UAE courts are less likely to redraft covenants and may invalidate the entire restriction.
Failure to explicitly carve out pre-existing activities creates immediate breach risk. Well-drafted covenants include schedules listing permitted activities, define 'competitive' narrowly, and distinguish between passive investments and active operational roles.
Practical takeaways
For investors
Structure employment relationships within DIFC or ADGM, where possible, to access common-law enforceability standards and robust judicial remedies. Tailor restrictions to actual competitive threats rather than applying template provisions.
Conduct a comprehensive legal review to ensure consistent restrictive covenant language across all documentation. Link restrictive covenant compliance to vesting acceleration and exit rights to create alignment beyond legal enforceability. Include clear governing law and jurisdiction clauses and specify remedies, including injunctive relief.
For founders
Negotiate realistic limits on durations, geographic scope, and activity restrictions that reflect actual competitive overlap. Disclose and document all existing investments, advisory roles, and personal projects, ensuring these are explicitly excluded from restrictive covenants.
Clarify how restrictions apply to remote work, digital businesses, and activities outside the UAE. Ensure restrictive covenant obligations are balanced against vesting acceleration and exit participation. Obtain independent legal advice familiar with the applicable jurisdiction before signing.
Red and green flags
Red flags
- Blanket prohibitions without a defined scope.
- Indefinite non-compete durations or periods exceeding two years in onshore UAE contexts.
- Missing or ambiguous governing law clauses.
- Inconsistent covenant language across documents.
- No carve-outs for existing activities.
- Identical restrictions applied to all founders regardless of role.
Green flags
- Targeted restrictions tied to specific competitive threats.
- Time-bound durations appropriate to the jurisdiction.
- Clear definitions.
- Harmonised language across all governing documents.
- Jurisdiction-specific compliance.
- Explicit carve-outs.
- Tiered restrictions reflecting founder seniority.
- Economic alignment through vesting and exit rights.
Conclusion
The enforceability of restrictive covenants in UAE venture capital transactions depends fundamentally on clarity, proportionality, and consistency. Investors and founders must understand the material differences between onshore civil-law constraints, DIFC common-law flexibility, and ADGM reasonableness standards.
Onshore UAE frameworks impose statutory limits that cannot be contracted around. DIFC and ADGM offer greater flexibility but require a demonstrable nexus between restrictions and legitimate business interests. Across all three regimes, courts scrutinise whether covenants are necessary, reasonable, and balanced against the founder's economic freedom.
Practical enforceability requires meticulous drafting that harmonises employment agreements, shareholder documentation, and investment terms. Investors who tailor covenants to actual competitive threats, provide clear carve-outs, and link restrictions to economic incentives will achieve both enforceability and founder buy-in. For founders, understanding these frameworks enables informed negotiation of realistic restrictions that protect investor interests without unduly constraining future opportunities.
As the UAE venture ecosystem continues to mature, sophisticated handling of restrictive covenants will distinguish well-structured transactions from those vulnerable to enforcement challenges. Both investors and founders benefit from early engagement with jurisdiction-specific requirements, comprehensive documentation review, and balanced covenant design that reflects current UAE law and market practice.
© Taylor Wessing LLP 2025
© Taylor Wessing LLP 2025