Dubai Fact-File Part 1:
Business Formation for Individuals

1.9 Dubai Venture Capital

Venture capital involvement is also a possibility, and there are several different ways in which this can be achieved. A number of companies exist which can assist with venture capitalist funding. The Gulf Venture Capital Association (GVCA) is a non-profit making association for venture capital and private equity and provides information and support on the subject of venture capital (www.gulfvca.org/).

Some of the ways in which venture capitalists can become involved in a new business are as follows:

• Seed financing: Provided ahead of the launch of the business, and allows for the development of the business concept, the creation of a business plan, market research, and finally, bringing the product in question to the market. This type of investment usually requires a fair amount of involvement and support on the part of the venture capital firm, and is therefore generally a less popular option, except for specialist firms. Often this type of funding comes from family members or friends, keen to invest in a new venture.
• Start-up financing: Does what it says on the tin, really. Start-up financing is designed to support small businesses through the product development period, and with initial marketing. Smaller start-ups are less likely to be of interest to VC investors, but as with seed financing, there are some specialist firms that may be willing to invest.
• Early stage financing: Designed to provide support during the manufacturing and sales process to businesses that have developed their product, but are not yet profitable
• Development/Growth financing: Designed to assist in the expansion of an existing company.
• Abundant funds are available from private and corporate investors, or so-called ‘business angels’, for business start-ups.

How the financing is provided to the independent will vary according to the arrangement that is reached with the venture capital firm or business angel. It is worth bearing in mind, however, that the private equity sector is still a fairly young one in Dubai, and that the Shariah principles which govern Islamic investment generally are likely to restrict the business types that an investor will be prepared to back.

However, as a general guide, investors (public or private sector) may become involved in an independent’s business in several ways, including the following:

• Preference shares: Holders of preference shares receive priority with regard to the payment of dividends, and receive a fixed dividend amount. However, they have no voting rights. (Only of interest to incorporated businesses);
• Ordinary shares: Voting shares and non-voting shares are available; both offer an equal share of the profits, but the latter are usually less valuable, as they do not allow the shareholder to vote on policy matters, or on the composition of the company’s board. (Only of interest to incorporated businesses);
• Debentures: A type of medium to long-term loan, repayable at a fixed rate of interest, which can be secured or unsecured. Convertible debentures can be converted to equity shares, at a future point;
• Secured loans: Loans provided with an asset belonging to the borrower as security. The asset can be claimed by the lender in the event of a default on the loan;
• Unsecured loans: Usually offered based on the borrower’s credit rating, unsecured loans can be personal (with the individual responsible for repaying the loan), unsecured business loans (with the business responsible for repaying the loan), or unsecured business loans with a personal guarantee (where the individual giving the guarantee is responsible for repaying the loan if the business defaults.

 

Introductory Guides

Dubai Artist Tax Guide

Dubai Contractor Tax Guide

Dubai Entrepreneur Tax Guide

Dubai Professional Tax Guide

Dubai Small Business Tax Guide

Dubai Sportsperson / Entertainer Tax Guide

Fact-File

Part 1: Dubai Business Formation for Individuals

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