CAYMAN ISLANDS Law and Practice Contributed by: Simon Thomas, Richard Spencer, Alexandra Clynes and Sayak Bhattacharya, Campbells
ty or competitive fundraising environments can extend timelines. Below is an analysis of the relationships of the various parties in one round. Existing v New Investors • Conflicting Interests: New investors often negotiate preferential terms (eg, liquidation preferences, anti-dilution protections), which can conflict with existing shareholders’ rights. Existing investors may resist terms that dilute their ownership or alter governance struc - tures. • Pro-Rata Rights: Existing investors may exer - cise pro-rata rights to maintain their owner - ship percentage in follow-on rounds. If they decline, new investors can fill the gap, leading to shifts in control. • Valuation Sensitivity: Existing investors may push for “flat round” (same valuation as prior rounds) to avoid dilution, while new investors might demand an “up round” if the compa - ny’s value has increased. Majority Requirements v Unanimous Consent • Majority Approval: (a) Investor Majority: Decisions like equity issuance or corporate actions often require approval from investors holding a majority of shares (eg, 50–75%). This streamlines decision-making but may marginalise minority stakeholders. (b) Class-Specific Consent: Protective provi - sions for preference shareholders (eg, veto rights over exits) may require major - ity consent within their class. • Unanimous Consent: (a) Such consent is required for amendments affecting distribution rights or economic entitlements in fund agreements. Unanim -
ity is rare due to practicality concerns but may apply to high-stakes changes. (b) Founder Safeguards: Founders may negotiate exceptions to prevent minority investors from blocking critical decisions (eg, operational budget approvals). The above factors ensure balanced governance while protecting stakeholder interests in evolving In the Cayman Islands, venture capital financ - ings often involve instruments beyond common stock equity issuances, particularly in early- stage investments, as outlined below. Preference Shares • Features: These shares typically offer divi - dend rights, liquidation preferences, anti- dilution protections, protective provisions and exit rights (eg, redemption options if an anticipated exit event does not occur within a specified timeframe). • Investor Protection: Preference shares provide investors with priority over ordinary shareholders in case of liquidation, and in payments of dividends/making of distribu - tions, ensuring a higher level of protection for their investment. Investors also typically either negotiate board representation and/ or a schedule of protective provisions (the content/scope of which will vary depending on the proportionate stake being acquired on a post-money basis) to protect against fun - damental changes in the company or in the negotiated rights of the investors. Convertible Notes • Use in Early-Stage Financing: Convertible notes are common in early-stage investments venture capital landscapes. 3.3 Investment Structure
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