ESOP in Saudi Arabia: Why Your Entity Type Decides What You Can Actually Grant

A Saudi startup's ESOP options depend almost entirely on one decision made at incorporation: LLC or Simplified Joint Stock Company (SJSC). An LLC's owners hold "interests," not shares, and every other partner has a right of first refusal over any transfer — which makes issuing real stock options awkward the moment an employee exercises. An SJSC, the company form introduced under Saudi Arabia's current Companies Law, can define multiple share classes in its bylaws and was built for exactly this. Most funded Saudi startups either convert to an SJSC before a priced round or run their ESOP on phantom shares instead of real equity.

Generic ESOP guides — vesting cliffs, 10-15% pool sizing, ISOs vs. NSOs — are written for Delaware. None of that addresses what actually blocks a Saudi founder: can your entity legally hand an employee a share at all, and what happens the day they try to exercise.

Two entity types, two different starting points

Saudi Arabia's current Companies Law (Royal Decree M/132, in force since January 2023) gives founders three relevant company forms, but only two show up at the Seed-to-Series-B stage:

• Limited Liability Company (LLC) — the default vehicle most startups form with. Owners hold capital "interests." No minimum capital requirement, one or more owners allowed, managed by one or more managers rather than a mandatory board.
• Simplified Joint Stock Company (SJSC) — also no minimum capital, also open to a single shareholder, but its owners hold actual shares, and its bylaws can create different classes of those shares with different rights.

The third form, the standard Joint Stock Company, carries a SAR 500,000 minimum issued capital and a full board-and-general-assembly governance structure built for listed companies. It's not where an early-stage ESOP question gets decided, so most founders can set it aside until much later.

The LLC-vs-SJSC choice is the one that actually determines what you can grant.

Why an LLC makes real options awkward

An LLC's capital is divided into interests, not shares, and those interests aren't freely tradable. Article 178 of the Companies Law gives every existing partner a right of first refusal over any transfer of an interest — and an employee exercising a stock option and receiving a new interest counts as exactly that kind of transfer. In practice, a grant that should be a cap table entry can turn into a consent round among every existing partner.

There's a second, quieter problem: LLC interests generally carry proportional rights tied to ownership percentage, without the kind of bylaw-defined share classes that let you hand an employee economic upside without full voting or transfer rights. You can draft around some of this in the company's articles, but you're fighting the entity type rather than using it.

This is the same shape of problem UAE mainland LLCs have under their Commercial Companies Law — different statute, same underlying issue: an entity form built for a small group of partners with equal footing doesn't flex well for a growing option pool. See phantom shares vs. stock options for how that comparison plays out mechanically.

The SJSC: built for a cap table with more than one class of owner

The SJSC exists specifically to solve this. It carries no minimum capital requirement, can be formed by a single shareholder, and — critically — its bylaws (Articles 142 through 154 of the Companies Law) can set out separate classes of shares with different rights, lock-up periods of up to ten years, transfer approval clauses, and forced-sale provisions. That's the toolkit a VC-backed company actually needs: ordinary shares for founders and employees, preferred shares with liquidation preference for investors, and an ESOP pool that can be carved out and governed on its own terms.

This is why the typical pattern among funded Saudi startups is to incorporate as an LLC, then convert to an SJSC around their first priced round — the same point at which a US company would be negotiating its first preferred stock purchase agreement. The conversion itself needs unanimous shareholder approval once there's more than one shareholder on the register, which is straightforward with two co-founders and gets harder every investor you add after that. Founders who know they'll raise priced rounds and want a real option pool are often better off converting earlier, while unanimous consent is still cheap to get.

Phantom shares: the instrument for LLCs that aren't converting yet

Not every Saudi startup is ready to convert, and not every LLC needs to. A phantom share — or a stock appreciation right (SAR) — is a contractual promise to pay cash tied to the value of the company's shares at a defined trigger, usually an exit or a future financing round. The employee never becomes an interest-holder, so Article 178's right of first refusal never activates, and the LLC's transfer mechanics stay untouched.

For a Saudi LLC, this isn't a downgrade from "real" equity — it's usually the cleanest instrument available while the company stays an LLC. The tradeoff is the one any phantom-equity holder takes on anywhere: no voting rights, no entry on the ownership register, and a payout that depends on the company honoring a contract rather than the employee holding a transferable asset. That tradeoff is worth naming to employees directly rather than calling a phantom grant "stock options" and letting them assume otherwise.

Securities treatment: lighter than founders expect

Saudi Arabia's Capital Market Authority treats employee stock option plans as exempt offers under its Offers of Securities Regulations — there's no pre-offer or post-offer filing requirement to launch a plan. The company does still need to file with the CMA for any quarter in which award-related activity (new grants, exercises) actually occurs, so an ESOP isn't entirely outside CMA's view — it's just a much lighter compliance path than a public securities offer, and far lighter than founders coming from a US 409A-and-Form-S-8 mental model expect.

Tax and GOSI: one genuinely simple part of this

Saudi Arabia doesn't levy personal income tax on salaries or other employment compensation, and that treatment extends to equity awards — no tax due at grant, at vesting, or at exercise for the employee. There's no 83(b)-style election to file, no decision about when to recognize income, because there's no income tax event to time in the first place.

GOSI contributions are calculated on an employee's basic salary and housing allowance, not on the value of equity they hold or have been granted, so an ESOP grant doesn't change what either the company or the employee owes GOSI. The one caveat worth flagging to any non-Saudi hire: this zero-tax treatment applies under Saudi law to Saudi-sourced compensation — an expatriate employee who's a tax resident elsewhere may still owe tax on the grant under their home country's rules, independent of what Saudi Arabia charges.

Building the plan in the right order

The sequence that avoids rework: confirm your entity type first, pick the instrument second, size the pool last. An SJSC can default to real shares and treat the bylaws as the place where class rights and vesting terms live. An LLC should plan on phantom shares or SARs as the primary instrument unless and until it converts — not discover the Article 178 problem the first time someone tries to exercise. Pool size itself doesn't move with entity type: 10-15% of fully diluted equity is the range most VC-backed startups land in globally, and nothing about Saudi company law changes that math.

If you've already worked through the formation side — a founders' agreement or your company's incorporation documents — the same principle carries over: don't import a Delaware option plan template and assume the mechanics transfer. The entity decides the instrument.

Govy's ESOP module treats stock options, RSUs, SARs, and phantom shares as distinct instrument types on the same cap table ledger, with jurisdiction-aware contract generation built for Saudi Arabia specifically — so an LLC running phantom shares today and the SJSC it converts to next year sit on the same audit trail instead of two disconnected spreadsheets. See how it works.

FAQ

Can a Saudi LLC issue real stock options to employees? Not cleanly. Owners of a Saudi LLC hold "interests," not shares, and Article 178 of the Companies Law gives every other partner a right of first refusal over any transfer — including one created when an employee exercises an option. Most LLCs route equity-linked pay through phantom shares or SARs instead, or convert to a Simplified Joint Stock Company before granting real equity.

What is a Simplified Joint Stock Company and why do startups convert to one? An SJSC is a company form created under Saudi Arabia's current Companies Law with no minimum capital requirement, room for a single shareholder, and bylaws (Articles 142-154) that can define separate classes of shares with different rights — the mechanism a VC-backed cap table needs for ordinary founder shares and preferred investor shares to coexist. Startups convert from LLC to SJSC specifically to get that share-class flexibility, usually around a priced round.

Do employees pay tax on stock options in Saudi Arabia? No. Saudi Arabia does not levy personal income tax on salaries or employment compensation, and that extends to equity awards — there's no tax event at grant, vesting, or exercise for the employee. GOSI contributions are calculated on basic salary and housing allowance, not equity value, so option grants don't enter that calculation either.

What are phantom shares and why are they common in Saudi ESOPs? A phantom share is a contractual right to a cash payout tied to share-value growth — the employee never becomes a shareholder of record, so an LLC's transfer restrictions never get triggered. For a Saudi LLC that isn't ready to convert to an SJSC, phantom shares deliver the same economic upside as options without the partner-consent problem, which is why they're the default instrument rather than a workaround.

How much equity should a Saudi startup set aside for an option pool? 10-15% of fully diluted equity is the range most VC-backed startups use globally, and nothing about Saudi entity law changes that math — pool size is a hiring and dilution question, not a jurisdiction one. What changes by entity type is the instrument filling the pool: real shares for an SJSC, phantom shares or SARs for most LLCs.