CAYMAN ISLANDS Law and Practice Contributed by: Simon Thomas, Richard Spencer, Alexandra Clynes and Sayak Bhattacharya, Campbells
against both percentage and economic dilution in subsequent funding rounds. The forms are as follows: • Full Ratchet: (a) adjusts the conversion price of preferred shares to match the price per share of the new issuance, regardless of the amount raised; and (b) is most favourable to investors but less common due to its impact on founders and other shareholders. • Broad Based Weighted Average: (a) adjusts the conversion price based on a formula that considers the number of new shares issued and their price relative to previous rounds; and (b) balances investor protection with fairness to existing shareholders and is the more commonly adopted mechanism. These provisions are typically included in the company’s memorandum and articles of asso - ciation (M&AA), ensuring enforceability in future rounds. Pre-Emption/Subscription Rights Prevalence: Pre-emption rights are frequently incorporated into financing agreements to allow existing shareholders (including VC investors) to subscribe for new shares before they are offered to external parties. The forms are as follows: • Mandatory Pre-emption Rights: Existing shareholders are entitled to subscribe for new shares proportionate to their current hold - ings. This right is often stipulated in investors’ rights agreement.
• Negotiated Pre-emption Rights: Investors may negotiate broader pre-emption rights, allowing them to acquire additional shares beyond their proportional entitlement during new issuances. Such rights protect against percentage dilution by enabling investors to maintain their owner - ship stakes and ensure alignment between exist - ing shareholders and incoming investors during equity raises. Neither anti-dilution nor pre-emption rights are statutory under Cayman Islands law. Instead, they must be expressly agreed upon in govern - ing documents (eg, M&AA, subscription agree - ments or the shareholders agreements). Recent shifts in market conditions have led to more favourable terms for investors in venture capital and private equity financings in the Cay - man Islands, particularly in light of economic uncertainty and increased competition for capi - tal. These terms are designed to enhance inves - tor protections and returns, especially in down - side scenarios. Below are the key developments. Participating Liquidation Preferences • Participating liquidation preferences have become more common, allowing investors to “double dip” by receiving their initial invest - ment (liquidation preference) and participating pro-rata in the remaining proceeds alongside common shareholders. • Some agreements include capped participa - tion, limiting the additional returns investors can receive beyond their liquidation prefer - ence to balance fairness among stakeholders. Compounding Preferred Returns • Preferred returns that compound annually have gained traction, particularly in funds with
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