CAYMAN ISLANDS Law and Practice Contributed by: Simon Thomas, Richard Spencer, Alexandra Clynes and Sayak Bhattacharya, Campbells
6. Exits 6.1 Investor Exit Rights
Legal documentation • ESOP terms (eg, vesting schedules, exercise prices) are formalised in a documented plan approved by the board and shareholders, with shares reserved for issuance thereunder during the investment round. • Employees will enter into separate share option agreements/awards with the company. Post-Funding Hiring • Post-investment, the ESOP is used to grant equity to new hires, aligning their incentives with the company’s growth trajectory. Dilution dynamics Dual Dilution sources • Investment Round: Issuing new shares to investors reduces all existing shareholders’ ownership proportionally. • ESOP Creation: Reserving shares for employ - ees further dilutes existing shareholders. Cumulative impact • Early employees face double dilution: from new investor shares and subsequent ESOP expansions. Valuation v dilution trade-off • While dilution reduces ownership percent - ages, a higher post-money valuation can increase the absolute value of equity. In terms of anti-dilution protections, investors may secure weighted-average anti-dilution rights, but employees rarely receive similar pro - tections. Alternative structures include the use of phantom equity or RSUs to incentivise employ - ees without immediate share issuance. In terms of the vesting schedule, it is recommended to implement four-year vesting with a one-year cliff to ensure employee retention aligns with com - pany milestones.
In the Cayman Islands, shareholders’ rights dur - ing liquidity events such as trade sales or IPOs are typically governed by a combination of con - tractual provisions and corporate law. Below are the key exit-related provisions that regulate shareholders’ interactions. Drag-Along Rights • These provisions allow a majority shareholder (often investors) to force minority sharehold - ers to sell their shares to a buyer on the same terms as the majority. Tag-Along Rights • Minority shareholders have the right to join a sale initiated by majority shareholders, ensuring they are not left behind. This pro - tects minority shareholders by allowing them to participate in exit opportunities on equal terms. Such rights are often paired with drag- along rights to balance majority and minority interests. Pre-Emption Rights • Existing shareholders have the right to pur - chase new shares before they are offered to external parties, maintaining their owner - ship percentage. This prevents dilution and ensures existing shareholders can participate in future equity issuances. While not directly related to exits, pre-emption rights can influ - ence ownership structures leading up to an IPO or trade sale. Lock-Up Agreements • Such agreements prohibit shareholders from selling their shares for a specified period post-IPO to maintain market stabil - ity. This encourages long-term investment
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