CAYMAN ISLANDS Law and Practice Contributed by: Simon Thomas, Richard Spencer, Alexandra Clynes and Sayak Bhattacharya, Campbells
fosters a sense of ownership and account - ability while enhancing employee retention. Employment agreements with restrictive covenants • Non-compete clauses prohibit founders and key employees from engaging in competing businesses for a specified period after leaving the company. • Non-solicitation clauses prevent former employees from poaching clients or staff post-departure. • Employment contracts may tie bonuses or equity vesting to achieving specific business goals, ensuring alignment with company performance. Founder lock-up agreements/share restriction agreements • Founders often enter into lock-up agreements restricting the sale or transfer of their shares for a defined period (eg, three to five years). This ensures stability during critical growth phases and reassures investors of the found - ers’ long-term commitment. • Founders may alternatively enter into a share restriction agreement whereby their shares are subject to a right of first refusal in favour of the company should the founder leave within a certain time period before shares have vested. Governance Mechanisms to Retain Control • Founders may negotiate provisions to retain control over strategic decisions despite equity dilution: (a) Founder Director Rights: These rights ensure founders maintain board represen - tation, giving them influence over major decisions. (b) Super-Voting Shares: Founders may hold shares with enhanced voting rights (eg,
ten votes per share) to preserve control while raising external capital.
5.2 Securities Please see 5.1 General .
5.3 Taxation of Instruments Please see 4.2 Tax Treatment . 5.4 Implementation
The implementation of an investment round and the set-up of an employee incentive programme (eg, stock option pools) are closely linked pro - cesses, with overlapping impacts on company ownership and dilution. Below is a breakdown of their relationship. Process Interrelation Investment round triggers ESOP creation/ expansion • Pre-Money Option Pools: Investors often require companies to establish or expand employee stock option pools (ESOPs) before finalising the investment. This ensures suf - ficient equity is reserved for future hires, with dilution borne by existing shareholders (founders/early employees) rather than new investors. • Post-Money Option Pools: These are less common, as investors prefer pre-money structures to avoid dilution of their own shares. Valuation and equity allocation • The ESOP size (typically 10–20% of fully diluted shares) is negotiated during the investment round. Larger pools may be man - dated for growth-stage companies planning aggressive hiring.
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