Founder shares and employee stock options in an Egyptian company

Executive summary

• Law No. 4 of 2018 narrowed the trading ban in article 45 of the Companies Law to founders' parts and shares issued for contributions in kind, but the executive regulations still bar trading in the shares subscribed by the founders, including those paid for in cash, until the financial statements for two full financial years are published (article 136 of the regulations, as replaced by Minister of Investment Decree No. 16 of 2018).
• A shareholders' agreement is lawful at incorporation or afterwards, but it binds the other shareholders only if an extraordinary general meeting approves it by at least three quarters of the capital (article 9 bis).
• A class of shares may carry privileges in voting, profits or liquidation proceeds, but voting and liquidation privileges may not be combined (article 35).
• Employee share plans are available to joint stock companies: free shares, shares sold on preferential terms, or a promise to sell after a set period, by decision of the extraordinary general meeting (article 48 bis and the executive regulations).
• For salary tax, the benefit is the difference between the share's fair value on the date it is acquired and what the employee paid, and where transfer is restricted it arises only when the restrictions lapse (article 11 of the Income Tax executive regulations).

The legal form comes first

Shares and share options belong to the joint stock company. A limited liability company may not issue negotiable shares or bonds (article 4 of Companies Law No. 159 of 1981), and the Law's employee incentive scheme rests on employees owning "part of its shares". A startup that intends to give staff an equity stake, or to bring in investors for shares, starts from that choice, as set out in Egypt's company forms and the capital each requires.

Founders' shares: what is restricted

Article 45 of the Companies Law, its first and second paragraphs as replaced by Law No. 4 of 2018, provides that "founders' parts and shares issued for contributions in kind may not be traded before the company's financial statements for two full years, each of not less than twelve months, beginning from the date of incorporation, have been published", and that otherwise shares in joint stock companies are traded under the Companies Law and the Capital Market Law. The amendment thus dropped the "shares subscribed by the company's founders", which the original text had also barred from trading. Companies subject to Investment Law No. 72 of 2017 may trade founders' parts and shares within the first two financial years with the approval of the competent minister (article 53 of that Law).

The executive regulations did not follow this narrowing. Article 136 of the regulations, as replaced by Minister of Investment Decree No. 16 of 2018 after the Law was issued, provides that "shares issued for contributions in kind, and shares subscribed by the company's founders, may not be traded" before the financial statements for two full financial years are published, and extends the ban to what the founders subscribe in any capital increase during that period. A founder who subscribed in cash should therefore not rely on the Law's text alone without confirming the position of the General Authority for Investment and Free Zones (GAFI). Both texts still allow founders' shares to be transferred between founders by assignment (article 45, third paragraph, and article 137 of the regulations).

A separate price rule applies: until the financial statements for a full financial year are published, shares may not be traded "above the value at which they were issued plus, where applicable, the issue expenses", except on conditions set by ministerial decision (article 46). A sale of shares to an investor at a premium before the first full year's statements are published should be checked against that provision.

"Founders' parts" are not founders' shares. They are a special instrument that may be created "only in return for the assignment of a concession granted by the Government or of an intangible right" (article 34 of the Law and article 153 of the executive regulations).

The founders' and shareholders' agreement

Since Law No. 4 of 2018, "shareholders or partners may, at incorporation or afterwards, enter into an agreement governing the relationship between them". The agreement does not bind the other shareholders or partners unless approved by the extraordinary general meeting by a majority of not less than three quarters of the capital, or by a higher majority in the cases set by the regulations (article 9 bis). Those cases include an agreement that confers additional rights in voting, profit distribution or on liquidation, or that places restrictions on dealings in the shares or on the management of the company (article 2 bis of the regulations).

This is where founders' arrangements are written down: shares vesting in stages, what happens to a founder who leaves early, restrictions on sale to third parties, and pre-emption between founders. Their effect against the other shareholders depends on the general meeting's approval.

Share classes and privileges

"The articles may provide for certain privileges for certain classes of shares in voting, profits or liquidation proceeds", provided shares of the same class are equal, "and voting and liquidation privileges may not be combined"; the rights of a class may be varied only by the extraordinary general meeting with the consent of two thirds of the holders of that class (article 35, second paragraph). Preference shares may be issued, or capital increased by preference shares, only with the approval of the extraordinary general meeting by three quarters of the company's shares before the increase and an amendment of the articles (article 35, third paragraph).

Employee share plans

Article 48 bis provides that "the company's articles may include one or more schemes to reward or motivate the company's employees and managers through their direct or indirect ownership of part of its shares", as the regulations provide, with the Financial Regulatory Authority preparing the model documents and reviewing the contracts. The regulations allow three methods (article 151): free shares, shares sold on preferential terms, or ownership of part of the shares after a set period, and the scheme may be administered by a custodian, a securities firm or an employee shareholders' union.

• The decision: the scheme is adopted by the extraordinary general meeting, and the board's proposal must set out the number of shares, the conditions for beneficiaries, the valuation method, voting and dividend rights before ownership passes, the lock-up period, an independent assessment of the scheme's effect on existing shareholders, and whether the company must buy back the shares if the employee leaves (article 151 bis of the regulations).
• Free shares and preferential sales: the shares are subject to a lock-up period whose minimum the general meeting sets, the holder receives dividends during it, and an employee who bought in instalments and resigns before paying in full may pay the balance or recover what he paid, computed on the share value when the resignation is accepted (article 152).
• The promise to sell, the regulations' form of share option: the company promises to sell a number of its shares at a price fixed in advance, "without the beneficiary having any right in the shares subject to the promise until he fulfils the conditions and pays the price in full". The scheme sets out the promise period, the vesting conditions such as years of service and company performance, and the effect of resignation, retirement and death. Promises may not be assigned, and an employee who suffers permanent disability receives the promised shares at once (article 152 bis).

Shares the company buys to run the scheme are subject to two limits: the company may not acquire more than 10% of its issued shares (article 48 of the Law), nor keep them more than one calendar year after the period set for the scheme ends, by the end of which it must dispose of them to employees or third parties or reduce its capital (article 150 of the regulations). Article 48 of the Law itself counts the year from the date the company acquires the shares.

Tax on granted shares

The salary tax base includes "cash and in-kind benefits of all kinds" (article 9 of Income Tax Law No. 91 of 2005). The executive regulations value the benefit of "company shares granted at less than the share's fair value" as the difference between the share's fair value on the date it is acquired and the amount charged to the employee, "and where there are restrictions on transfer of ownership of the shares, the benefit arises only when those restrictions lapse" (article 11(5), as amended by Minister of Finance Decision No. 74 of 2008).

The employer must withhold and remit the tax with the payroll and include the benefit in the annual settlement statements, and the employee remits it himself where article 16 requires, for example where the payer is non-resident. A company registered under the simplified tax regime does not remit salary tax monthly: its obligation is limited to filing the annual settlement return together with payment of the tax (article 12 of Law No. 6 of 2025). The tax is computed on the individuals' table, as set out in Egypt's personal income tax brackets. The gain on a later sale of the shares falls under the capital gains rules, as set out in Egypt income tax after Law No. 151.

What this requires

• Choose a joint stock company if the plan is to give staff shares or to bring in investors for shares.
• Write the founders' agreement early, and put it to the extraordinary general meeting so that it binds the other shareholders.
• Plan on the founders' shares, cash or in kind, not being traded until two full financial years' statements are published, except by assignment between founders or, for Investment Law companies, with the competent minister's approval.
• Build the incentive scheme on the regulations: the general meeting's decision, the seven required items, the lock-up, the leaver terms, and sourcing the shares within the 10% cap and the one-year holding period.
• Value each share's benefit as the difference between its fair value on the date it is acquired and what the employee paid, and run it through the payroll on acquisition or, where transfer is restricted, when the restrictions lapse.

The firm's Corporate Legal Department drafts shareholders' agreements and employee incentive schemes and the amendments to the articles they require, working with the Tax Department on their tax treatment.

Mahmoud Nassef, Founder Partner
Chartered Accountant, Ministry of Finance, Egypt

Member, Egyptian Society of Accountants & Auditors
Member, Egyptian Tax Society
Member, Egyptian Society for Public Finance and Taxation

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Disclaimer: This bulletin is prepared for general information on the legislation in force at the date of its publication. It does not constitute a professional opinion or tax or legal advice on any particular matter, and it should not be relied upon in place of advice based on an examination of the circumstances of each case. Nassef & Partners International accepts no responsibility for any action taken, or refrained from, in reliance on its contents. The positions stated remain subject to subsequent legislation and decisions.