Venture Capital 2025 Comparisons

Campbells had a busy 12-month period where it advised on the following:

• QI Tech, a Brazilian fintech, in connection with its initial USD200 million Series B funding and USD50 million Series B extension round, led by General Atlantic, with participation from Across Capital;
• Xapo Bank, a formerly VC-backed virtual asset currency provider, in connection with a management buyout, in a transaction involving capital flows in excess of USD2 billion;
• NG Cash (a Brazilian digital bank targeting younger generations) in its USD12.5 million Series A round, led by Monashees and Andreessen Horowitz;.
• netLex, a Brazilian life cycle management provider in its USD22.7 million funding round, led by Riverwood; and
• Brandlovrs, a Brazilian marketing start-up that uses AI to match companies with creators, in its fundraising of USD6.6 million led by Kaszek.

The Cayman Islands continues to see significant growth in the venture capital industry, with the number of private funds registered with the Cayman Islands Monetary Authority at an all-time high with the total number of funds registered reaching over 30,000 by the end of 2024.

Notable trends included a rise in venture capital funds investing in cryptocurrencies, blockchain, Web3, and decentralised finance (DeFi) and a continued focus on credit, infrastructure, real estate, private debt, and technology sectors.

In the venture capital equity financing space, 2024 saw more down rounds, convertible note financings, and series round extensions. However, the market is hopeful for an increase in equity rounds in the second half of 2025, with Q1 already showing an increase in activity compared to Q1 2024.

We have seen the Cayman Islands increasingly become a hub for venture capital investments in the blockchain space. Enhancements to the Cayman Islands Virtual Asset Service Providers Act have encouraged the establishment of funds investing in tokenised assets, NFTs, DAOs, and other blockchain-based projects. Cayman Enterprise City and Tech Cayman initiatives have further strengthened the fintech ecosystem by providing infrastructure and regulatory support. Beyond blockchain and fintech, venture capital activity has also focused on broader technology sectors such as software development, mobile gaming, and AI-driven solutions.

Latin American markets still favour the Cayman Islands for venture capital activity for various reasons, including investor familiarity, liability certainty, tax neutrality and legal certainty. While 2021-2024 saw primarily fintech companies using the Cayman structure, 2024-2025 is starting to see an increase in healthtech and education tech companies seeking funding through the offshore structure. In more recent times, we have seen a trend for some LatAm operating companies with holding structures in the USA to consider continuing out of the USA and into the Cayman Islands, in some cases to mitigate against regulatory risk borne out of the US nexus, in preparation for transactional activity.

Industries with high exit activities included financial services driven by strategic sales and PE-backed IPOs and technology (reflecting demand for mature software and enterprise tech companies). Industries attracting financing rounds included fintech and blockchain (each receiving early-stage/seed financing). Emerging areas like AI-driven solutions also drew seed funding during 2024.

The typical structure for a venture capital fund is the Cayman Islands-exempted limited partnership, which provides flexibility in capital commitments and distributions while offering limited liability protection for limited partners. One or more of the partners is a general partner who has legal responsibility for the operation of the partnership and management of its business, together with unlimited liability for the debts of the partnership. These are invariably Cayman Islands companies or foreign companies registered to do business in the Cayman Islands which have very few assets, to avoid serious financial loss pursuant to the general partner’s unlimited liability for the debts of the partnership. The remaining partners are limited partners, who are restricted from participating in the management of the partnership’s business, but who have liability for the debts of the partnership limited to the extent of their investment. Various activities may be carried out by limited partners without limited partners becoming liable as general partners by virtue of participating in the management of the partnership. Such funds are regulated under the Cayman Islands Private Funds Act (as revised) (for closed-ended funds).

The main governing document is the limited partnership agreement.

Fund principals (initiators, managers, or general partners) can participate in the economics of a venture capital fund through several mechanisms. These are designed to align their financial interests with the fund’s performance and incentivise long-term value creation. Typically this will be by way of (i) management fees (ie, an annual fee charged to limited partners (LPs) to cover operational expenses such as salaries, office costs, and travel typically set at 2% of the fund’s assets under management (AUM), following the “2/20 rule” and (ii) carried interest (“carry”) which is a share of the fund’s profits earned by general partners after surpassing a predefined hurdle rate (eg, 8%) distributed after portfolio companies exit successfully, typically in later years of the fund’s life (seven to ten years). It is generally set at 20% of profits, although this can vary based on fund size and structure.

Fund principals may also invest their own capital alongside LPs in portfolio companies, giving them direct exposure to potential upside.

2023/24 saw the introduction of CIMA’s enhanced corporate governance framework requiring funds to adopt risk-based governance structures, including independent directors for oversight, audit committees for larger funds and clear conflict-of-interest policies (much of which has already been adopted by venture-capital funds). The Beneficial Ownership Transparency Act (as revised), effective July 2024, also saw an expansion of scope to exempted limited partnerships (albeit funds registered with CIMA are able to avail themselves of an alternate route to compliance and provide a contact name for the reporting of beneficial ownership at the request of the Competent Authority as opposed to maintaining a beneficial ownership register).

A venture capital fund that is established in the Cayman Islands will usually be regulated as a Cayman Islands private fund in accordance with the Private Funds Act (as revised). A private fund is any company, unit trust or partnership (wherever established) that offers or issues or has issued investment interests, the purpose or effect of which is the pooling of investor funds with the aim of enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments, where:

• the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and
• the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly, but this does not include certain licensed or registered persons or any non-fund arrangements.

The general partner of the fund will typically be a Cayman Islands-exempted company. If the fund is managed by a fund manager, the fund manager may be registered in the Cayman Islands under the Securities Investment Business Act (as revised) or (as is usually the case) can be established elsewhere. No Cayman Islands laws or regulations will apply to a fund manager based in a jurisdiction other than the Cayman Islands.

The SIBA regulates “securities investment business”, which includes managing securities, dealing in securities, arranging deals in securities and advising on deals in securities. The SIBA defines the term “securities” widely and includes a list of instruments that are common in today’s financial markets (shares in the capital of a company, interests in a limited partnership, units of participation in a unit trust, debt instruments, warrants, certificates, options, futures and contracts for differences).

The SIBA designates certain persons as “Registered Persons” to whom the full licensing provisions of the SIBA do not apply. Entities that are eligible to become Registered Persons include, in summary, persons providing securities investment business on an intra-group basis, persons providing securities investment business to defined “high net worth” and “sophisticated” clients and persons regulated by a recognised overseas regulator in an overseas jurisdiction in which such securities investment business is being conducted.

The Cayman Islands’ venture capital landscape has evolved significantly over the past year, driven by regulatory innovation, market trends, and investor demand. Below are critical observations across impact funds, fund-of-funds activity, continuation funds, and broader sector dynamics.

Fund-of-Funds Activity

• Growth in Multi-Strategy Funds: Fund-of-funds structures focusing on digital assets, private debt, and equities have proliferated, with Cayman-registered funds increasingly pooling capital for diversified exposure. This aligns with global asset allocation trends favouring alternative investments

Continuation Funds

• GP-Led Secondary Market Growth: Continuation funds are increasingly deployed to extend holding periods for illiquid assets (eg, infrastructure, real estate). These structures allow existing investors to roll over interests or exit, while new capital is raised for follow-on investments.
• Hybrid Financing Models: Continuation funds leverage blended facilities combining uncalled capital commitments and asset portfolios to address concentration risks. This approach is particularly popular for tech and digital asset portfolios.

Impact and ESG Integration

• Emerging ESG Strategies: While explicit government-backed VC funds are not prominent, ESG-aligned funds are gaining traction. Cayman’s enhanced governance rules (eg, independent directors, risk frameworks) support impact-focused strategies.

Digital Asset Dominance

• Blockchain and Web3 Leadership: A significant number of Cayman-based fintechs raised capital in 2024, with funds leading investments in DeFi, NFTs, and tokenised assets.

Exit Environment

• IPO Pipeline Revival: Improved market conditions in 2025 are expected to unlock exits for mature VC-backed firms, particularly in fintech and AI.

Fund Strategies for Extended Average Holding Periods

To accommodate extended average holding periods, venture capital and private equity funds employ several strategies that align with long-term investment goals. These strategies focus on maximising returns over longer horizons while managing risks and capital efficiently. One approach involves structuring funds with longer lifespans, providing additional time to realise value from investments. Another strategy is the use of continuation funds, which allow fund managers to extend the holding period of existing assets, enabling further growth and value realisation without the pressure of an immediate exit. Buy-and-hold strategies emphasise holding investments for extended periods to benefit from compounding returns and reduced transaction costs; by avoiding frequent buying and selling, funds minimise the impact of market volatility and timing risks.

Due diligence with respect to Cayman Islands entities will typically include a review of:

• basic corporate information, including the memorandum and articles of association, registers of directors and of members, particularly to evaluate the requirement for any third party or shareholder/board consents and any most-favoured-nation provisions in respect of an investor;
• any charges included on the register of mortgages and charges;
• if the entity is in good standing with the Cayman Islands registrar of companies;
• whether compliant with economic substance and beneficial ownership regimes;
• any litigation against the entity; and
• all statutory books and records of the entity.

The timeline for completing a financing round in a growth-stage company with new anchor investors can vary depending on factors such as the company’s maturity, market conditions, and investor readiness. New anchor investors may require additional time for negotiation and due diligence compared to existing investors familiar with the company. Economic uncertainty 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 structures.
• Pro-Rata Rights: Existing investors may exercise pro-rata rights to maintain their ownership 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 a “flat round” (same valuation as prior rounds) to avoid dilution, while new investors might demand an “up round” if the company’s value has increased.

Majority Requirements v Unanimous Consent

• Majority Approval:
1. 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.
2. Class-Specific Consent: Protective provisions for preference shareholders (eg, veto rights over exits) may require majority consent within their class.
• Unanimous Consent:
1. Such consent is required for amendments affecting distribution rights or economic entitlements in fund agreements. Unanimity is rare due to practicality concerns but may apply to high-stakes changes.
2. 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 venture capital landscapes.

In the Cayman Islands, venture capital financings often involve instruments beyond common stock equity issuances, particularly in early-stage investments, as outlined below.

Preference Shares

• Features: These shares typically offer dividend 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 distributions, 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 fundamental 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 as they delay valuation discussions until later rounds.
• Conversion Terms: These notes convert into equity at a predetermined valuation or discount in future financing rounds, offering flexibility for both investors and companies. Some convertible instruments are linked to performance hurdles, or other trigger events, and offer interest capitalisation mechanics and other conversion ratchets, thereby enhancing the prospect of a greater upside for investors, particularly in depressed markets.
• Advantages: They are simpler to execute than equity rounds and provide a quick way to raise capital without immediate valuation disputes.

Redeemable Preference Shares

• Redemption Rights: These shares include provisions allowing investors to redeem their shares if certain conditions are not met (eg, failure to achieve an exit event within a specified timeframe).
• Flexibility: The terms of redemption can be tailored to suit investor needs, providing an exit mechanism if the company does not meet performance milestones.

Warrants

• Additional Equity Options: Warrants grant investors the right to purchase additional shares at a predetermined price, often used alongside other financing instruments.
• Incentivisation: They can incentivise investors by offering potential upside without immediate equity dilution.

SAFEs (Simple Agreements for Future Equity)

• Use in Early-Stage Financing: SAFEs are common in early-stage investments as they delay the issuance of equity until later rounds while still taking the benefit of a cash injection. SAFEs are also typically prepared on standard Y Combinator forms, which makes their use even more attractive particularly for founders seeking to limit negotiation and legal spend in these early stages of growth.
• Conversion Terms: The SAFEs typically convert into equity at a predetermined valuation or at a discount to the price per share in future financing rounds, offering flexibility for both investors and companies.
• Advantages: They are simpler to execute than equity rounds and provide a quick way to raise capital without immediate valuation disputes or dilution for the founders.

A typical financing round in a growth company in the Cayman Islands involves core documents such as a term sheet, subscription agreement, shareholders’ agreements, amended M&AA, PPM (if required), board resolutions, legal opinions, and updated statutory registers. The exact documentation may vary depending on the instruments issued (eg, preference shares v convertible notes) and specific investor requirements. These documents ensure clarity in governance, compliance with Cayman law, and protection for all parties involved in the transaction.

Frequently used templates in Cayman Islands financing rounds include NVCA model documents, adapted for use in the context of Cayman targets, which streamline transactions while maintaining compliance with local regulations and global best practices. Key templates include:

• Term Sheet;
• Share Purchase Agreement;
• Investors’ Rights Agreement;
• Voting Agreement;
• Right of First Refusal and Co-Sale Agreement;
• Management Rights Letters; and
• Director Indemnification Agreements.

Venture capital (VC) investors in the Cayman Islands typically secure critical rights to protect their investments in downside scenarios, such as company liquidation. These terms prioritise their financial recovery over other stakeholders like ordinary shareholders, founders, and employees. Below are the key terms and their implications.

Liquidation Preferences

• Priority in Asset Distribution: Preference shareholders (including VC investors) are typically entitled to receive a return of their investment (often 1x–2x the principal) before ordinary shareholders in a winding-up scenario. This is a standard feature of preference shares under Cayman law.
1. Ranking Order: After secured creditors (eg, banks) are paid, preference shareholders rank above unsecured creditors and ordinary shareholders, including employees and founders holding equity.

Redemption Rights

• Exit Mechanism: Investors can demand redemption of their shares if the company fails to achieve an exit (eg, IPO or sale) within a specified timeframe (typically two to five years).
1. Enforcement: If the company cannot pay, investors may issue a statutory demand and petition the court for liquidation (unless they have agreed to fund on a non-petition basis, which is rare). Failure to comply may provide grounds for a petitioner to approach the court for a just and equitable winding-up.
2. “Legally Available Funds” Defence: Companies may contest redemption claims by arguing insufficient “legally available funds”, but courts interpret this narrowly (excluding funds needed for ordinary operations).

Contractual Safeguards

• Automatic Conversion Triggers: Preference shares may convert to ordinary shares upon the occurrence of pre-determined event (eg, a qualified IPO) or, alternatively, upon a liquidation event, if redemption is infeasible, ensuring investors retain residual claims after creditors.

Governance Controls

• Veto Rights: Investors often secure veto rights over major decisions (eg, asset sales, debt issuance, amendments to governing documents or authorised share capital, issuances of security ranking pari passu or senior to the last issued preference share class) to prevent actions that could harm their position pre-liquidation.
• Liquidation Petitions: Investors can initiate “just and equitable” winding-up petitions if mismanagement or deadlock jeopardises their interests, though this requires court approval.

Anti-Dilution Protections

• Down-Round Adjustments: Full-ratchet or broad-based weighted-average anti-dilution clauses protect investors’ ownership percentages in subsequent down rounds, indirectly safeguarding their liquidation payouts.

Anti-dilution protections are widely used in Cayman Islands VC financings, particularly for preferred shareholders, as they safeguard investors against both percentage and economic dilution in subsequent funding rounds.

The forms are as follows:

• Full Ratchet:
1. adjusts the conversion price of preferred shares to match the price per share of the new issuance, regardless of the amount raised; and
2. is most favourable to investors but less common due to its impact on founders and other shareholders.
• Broad Based Weighted Average:
1. adjusts the conversion price based on a formula that considers the number of new shares issued and their price relative to previous rounds; and
2. 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 association (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 holdings. 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 ownership stakes and ensure alignment between existing 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 governing documents (eg, M&AA, subscription agreements 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 Cayman Islands, particularly in light of economic uncertainty and increased competition for capital. These terms are designed to enhance investor protections and returns, especially in downside 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 investment (liquidation preference) and participating pro-rata in the remaining proceeds alongside common shareholders.
• Some agreements include capped participation, limiting the additional returns investors can receive beyond their liquidation preference to balance fairness among stakeholders.

Compounding Preferred Returns

• Preferred returns that compound annually have gained traction, particularly in funds with longer holding periods or higher risk profiles (eg, growth-stage companies or distressed assets).
• This ensures that limited partners (LPs) receive a guaranteed return on their capital before general partners (GPs) earn carried interest, providing an incentive for strong fund performance.

Pay-to-Play Provisions

• These provisions require existing investors to participate in follow-on financing rounds to avoid losing certain rights, such as anti-dilution protections or liquidation preferences.
• In recapitalisation transactions or down rounds, pay-to-play provisions have been increasingly employed to encourage investor participation and ensure adequate funding.

Enhanced Redemption Rights

• Investors are negotiating stronger redemption rights, allowing them to redeem their shares if an anticipated exit (eg, IPO or trade sale) does not occur within a specified timeframe (typically two to five years).

Stricter Anti-Dilution Protections

• While weighted-average anti-dilution remains standard, full-ratchet adjustments have become more prevalent in down rounds or distressed financings, ensuring investors maintain their economic position regardless of new issuance prices.

Investors in Cayman Islands ventures typically secure significant influence over management and corporate governance through a combination of contractual rights, share class structures, and regulatory frameworks. Below are the key mechanisms and market-standard rights.

Governance Influence

• Board Representation:
1. Depending on the size of their investment as a proportion of the post-money valuation, investors often negotiate seats on the board of directors, or observer seats, particularly in growth-stage companies. This ensures direct oversight of strategic decisions and operational management.
2. Independent Directors: Cayman funds increasingly appoint independent directors to balance governance, mitigate conflicts of interest, and align with CIMA’s corporate governance guidelines.
• Veto Rights:
1. Investors secure veto power over critical decisions, such as:
1. major asset sales or mergers;
2. issuance of new equity or debt; and
3. changes to the company’s constitutional documents.
2. These rights are typically embedded in shareholders’ agreements (where they relate to key business decisions – eg, adoptions of or amendments to business plans) or the company’s articles of association (where they relate to key structural items – eg, creations of equity incentive plans, issuances of new securities ranking pari passu or senior to the last-issued preference share class).

Information Rights

• Investors require regular access to financial statements, operational updates, and material disclosures to monitor performance and compliance (often subject to confidentiality and trade secret carve-outs).

Market Standard Rights

• Liquidation Preferences: Preferred shareholders (eg, VC investors) have priority in asset distribution during winding-up, often receiving 1x–2x their investment before ordinary shareholders.
• Anti-Dilution Protections: Weighted-average or full-ratchet anti-dilution clauses adjust conversion prices in subsequent down rounds to protect investors’ ownership stakes.
• Redemption Rights: Investors may demand redemption of shares if exit events (eg, IPO) do not occur within two to five years. Failure to redeem can trigger winding-up proceedings.
• Pre-emption Rights: Existing investors maintain the right to participate in new equity issuances to avoid dilution, often codified in the company’s constitutional documents.
• Constitutional Document Provisions: The memorandum and articles of association (M&AA) define shareholder rights, voting thresholds, and reserved matters requiring investor consent (eg, mergers, material borrowings).
• Shareholders’ Agreements: These contracts formalise governance roles, exit mechanisms (eg, drag-along/tag-along rights), and dispute-resolution processes.

CIMA’s 2023 updates mandate robust governance frameworks, including conflict-of-interest policies, risk management systems, and transparency in decision-making. Operators (eg, boards) must act in the fund’s best interests, enhancing investor protections.

In venture capital and private equity financings in the Cayman Islands, representations, warranties, covenants, and undertakings are tailored to mitigate risks and ensure compliance with local laws. Below is a summary of market-standard terms and recourse mechanisms for breaches.

Representations and Warranties

Common Representations by a Cayman target as well as a VC investor, in the context of a VC financing:

• Corporate Authority:
1. valid existence, good standing, and authority to execute agreements, including under Cayman law;
2. confirmation that constitutional documents permit financings and security grants;
3. up-to-date capitalisation and disclosures as to potential dilution;
4. details of subsidiaries;
5. absence of third-party consents and related-party transactions; and
6. validity of shares to be issued in connection with financing.
• Financial and Operational Integrity:
1. accuracy of financial statements and absence of undisclosed liabilities; and
2. ownership of material assets, including intellectual property.
• Legal Compliance:
1. compliance with applicable regulatory regimes (eg, Private Funds Act, AML/KYC, economic substance, beneficial ownership, data protection, FCPA); and
2. no ongoing litigation or regulatory investigations.
• Security Validity:
1. enforceability of security interests over assets (eg, capital call rights, shares).

Investor Representations

• Accredited investor status, investment experience and compliance with AML/KYC requirements.

Covenants and Undertakings

Affirmative covenants

• Regulatory Maintenance:
1. registration with CIMA under the Private Funds Act (for funds) and ongoing compliance; and
2. regular financial reporting and notification of material adverse changes.
• Operational Commitments:
1. use of funds for agreed purposes (eg, growth initiatives); and
2. preservation of corporate structure and key assets.

Negative covenants

• Restrictions on Debt/Encumbrances:
1. limits on additional borrowing or security grants without investor consent.
• Exit Timelines:
1. commitment to pursue exits (eg, IPO, sale) within stipulated periods (typically two to five years).

Recourse for Breaches

Contractual remedies

• Indemnification: Investors may claim damages for losses caused by breaches of warranties (eg, misrepresentation in financials).
• Cure Periods: Ventures are allowed to rectify breaches (eg, late regulatory filings) within 15–30 days before defaults are triggered.
• Acceleration/Redemption Rights:
1. Lenders may demand immediate repayment or enforce security (eg, capital call rights).
2. Investors may redeem preference shares if exit timelines are missed.

Enforcement actions

• Liquidation Petitions: Investors can petition courts for winding-up if ventures are insolvent or breach material obligations.
• Tort Claims: For intentional misrepresentation or conspiracy, investors may pursue direct claims against founders/management.

Security enforcement

• Capital Call Rights: Lenders enforce security over uncalled capital via equitable assignments, requiring notice to investors under Dearle v Hall principles.
• Asset Realisation: Security over shares, bank accounts, or intellectual property can be liquidated to recover debts.

The Cayman Islands government and quasi-government entities have introduced several initiatives to support equity financing in growth companies, particularly in technology, innovation, and financial services. While direct equity investment programmes are limited, the jurisdiction’s regulatory framework and strategic economic policies create an attractive environment for venture capital and private equity activity.

Cayman Enterprise City (CEC) is a quasi-government special economic zone (SEZ) designed to attract global tech companies, start-ups, and innovation-driven businesses. Key incentives include:

• Tax Benefits: exemptions from corporate tax, capital gains tax, and import duties;
• Streamlined Set-up: fast-tracked business licensing and work permits for investors and employees; and
• Networking and Mentorship: access to a community of 250+ global companies, fostering collaboration and investment opportunities.

The Cayman Islands have no direct taxes of any kind. There are no corporation, capital gains, income, profits or withholding taxes. There are no inheritance taxes or death duties. Upon application to the government, Cayman companies, limited partnerships, trusts and SPCs can expect to obtain a written undertaking that they will be exempted from taxes for a minimum of 20 years (companies and SPCs) and 50 years (limited partnerships and trusts). Accordingly, any income or capital gains (whether accumulated or distributed) will not be subject to tax in Cayman. However, this may be taxable in the home jurisdiction of investors and any manager. The Cayman Islands does not have any double taxation treaties, and there are no exchange control or currency restrictions in the Cayman Islands. The Cayman Islands do not have any double taxation treaties.

Please see 4.1 Subsidy Programmes.

To secure the long-term commitment of founders and key employees, ventures in the Cayman Islands utilise a combination of equity-based incentives, contractual obligations, and governance mechanisms. These approaches align the interests of key stakeholders with the company’s growth objectives while ensuring retention and performance.

Equity or Quasi-Equity Based Incentives

Employee stock option plans (ESOPs)

• Purpose: ESOPs are widely used to incentivise and retain key employees by granting them the right to purchase shares at a predetermined price after meeting certain conditions (eg, vesting periods).
• Key Features:
1. Option Pool: A percentage of equity is reserved for employees, typically 10–20% of the company’s total shares.
2. Vesting Schedules: Standard vesting terms include a four-year schedule with a one-year cliff, ensuring employees remain committed for an extended period before fully benefiting from their options.
3. Tax Efficiency: The Cayman Islands’ tax-neutral regime ensures no local taxes on stock option grants or exercises, though employees may face tax liabilities in their home jurisdictions.

Restricted stock units (RSUs) or restricted ordinary share grants

• RSUs are occasionally used for senior management, granting shares outright after meeting performance or time-based milestones. Typically, such units are subject to transfer restrictions and include conditions allowing for repurchase by the company, which are activated in a scenario where the employee leaves.

Share appreciation rights or phantom stock units

• There are contractual entitlements tocash sums equivalent to the then fair market of an underlying security in the company, usually subject to vesting schedules.

Co-Investment Opportunities

Employee co-investment schemes

• Key employees are offered opportunities to invest alongside institutional investors in the company or fund, aligning their financial interests with long-term success. This approach fosters a sense of ownership and accountability 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 founders’ 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:
1. Founder Director Rights: These rights ensure founders maintain board representation, giving them influence over major decisions.
2. Super-Voting Shares: Founders may hold shares with enhanced voting rights (eg, ten votes per share) to preserve control while raising external capital.

Please see 5.1 General.

Please see 4.2 Tax Treatment.

The implementation of an investment round and the set-up of an employee incentive programme (eg, stock option pools) are closely linked processes, 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 sufficient 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 mandated for growth-stage companies planning aggressive hiring.

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 employees 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 percentages, 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 protections. Alternative structures include the use of phantom equity or RSUs to incentivise employees 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 company milestones.

In the Cayman Islands, shareholders’ rights during liquidity events such as trade sales or IPOs are typically governed by a combination of contractual 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 shareholders 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 protects 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 purchase new shares before they are offered to external parties, maintaining their ownership percentage. This prevents dilution and ensures existing shareholders can participate in future equity issuances. While not directly related to exits, pre-emption rights can influence 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 stability. This encourages long-term investment and prevents immediate post-IPO sell-offs. Such agreements are typically required by underwriters in IPOs to ensure orderly market conditions.

Redemption Rights

• Investors may have the right to redeem their shares if an exit event (eg, IPO, trade sale) does not occur within a specified timeframe (eg, two to five years). This provides an exit mechanism for investors if anticipated liquidity events are delayed or fail to materialise. Failure to redeem can lead to winding-up proceedings, as investors may petition the court to liquidate the company.

Exit-Related Governance Provisions

• Investors often secure board seats to influence strategic decisions, including exit timing and terms. Investors may also have veto power over major decisions, such as asset sales or mergers, to protect their interests leading up to an exit.

In addition to tag-along and drag-along rights, transfer restrictions include a right of first refusal whereby investors often hold a contractual right to purchase shares before they are offered to third parties. This ensures continuity and allows current stakeholders to retain ownership influence. A company’s memorandum and articles of association may restrict transfers unless approved by the board or shareholders. Transferors must also adhere to procedures outlined in shareholders’ agreements (eg, offering shares to existing investors first).

Exit mechanisms are typically defined in constitutional documents and financing agreements to align investor and company interests as outlined below.

Time-based exit events

• Redemption Rights: Investors may demand share redemption if an IPO or trade sale does not occur within a predefined period (eg, two to five years).
• Conversion Rights: Preferred shares often convert to ordinary shares upon IPO, enabling participation in public market liquidity.

Performance triggers

• Liquidation Preferences: In a sale or winding-up, investors receive priority payouts (1x–2x capital) before ordinary shareholders.
• Missed Milestones: Failure to meet revenue, valuation, or operational targets may trigger forced exits or investor redemption rights.

Enforcement of exit rights

• If a company cannot fulfill redemption obligations (eg, insufficient funds), investors may issue a statutory demand and petition for court-supervised liquidation. Winding-up petitions are advertised, allowing other creditors/shareholders to intervene, complicating control for the petitioning investor.

The scarcity of conventional exits has driven Cayman Islands investors to prioritise contractual redemption rights, NAV financing, and liquidation safeguards. Legal enforcement (eg, winding-up petitions) and innovative fund structures (eg, evergreen vehicles) now dominate market practice, reflecting a shift toward flexibility and preemptive risk mitigation in prolonged illiquid environments.

After a slowdown in 2022–2023 due to high interest rates and geopolitical uncertainty, 2024–2025 projections suggest a rebound in the IPO market, driven by easing regulations and investor confidence. Tech, fintech, and blockchain start-ups dominate IPO pipelines.

The IPO process for Cayman entities typically takes 6–18 months, influenced by factors such as market conditions, regulatory alignment, and corporate preparedness.

Cayman entities are frequently used as listing vehicles for IPOs on major exchanges (eg, NYSE, NASDAQ, Hong Kong). The Cayman Islands Stock Exchange (CSX) is less common for start-ups, as most target larger international markets.

The rarity of immediate IPOs has created a tangible market need for secondary market trading in the Cayman Islands. Mechanisms such as tender offers, private auctions, company buybacks, and trust structures are frequently used to provide liquidity for early investors, employees, and founders while maintaining control over ownership structures. These programmes are particularly relevant for companies at later funding stages or those experiencing delays in traditional exit events.

Existing memorandum and articles of association often impose pre-emption rights, board approval requirements, or outright transfer prohibitions, necessitating amendments to enable structured liquidity. Private company shares also lack transparent pricing mechanisms, leading to disputes over fair value. It is also necessary to balance founder/employee liquidity needs with investor protections (eg, anti-dilution rights, liquidation preferences).

Company-facilitated tender offers are a valuable tool for providing liquidity to employees and early investors while maintaining control over ownership structures. They serve as an interim solution when traditional exits like IPOs or trade sales are delayed, addressing stakeholder needs without compromising long-term strategic goals. However, careful planning around pricing, governance approvals, regulatory compliance, and funding sources is essential to ensure successful implementation.

A Cayman Islands venture capital fund will be regulated as a private fund with the Cayman Islands Monetary Authority in accordance with the Private Funds Act. Exemptions for “proprietary money” (eg, employee investments) apply only if participation is strictly limited to direct employees. Offering documents or marketing materials must contain prescribed language.

It is not commonplace to offer a venture capital fund’s shares/interests to the general public in the Cayman Islands and typically most investors/employees will be based outside of the Cayman Islands and therefore subject to the laws of those jurisdictions.

Shares/interests may be offered to Cayman Islands-exempted companies and exempted limited partnerships, but certain types of promotional activity in the Cayman Islands will require regulatory oversight. Legal advice should be sought in each case.

Structuring for multiple stakeholders may include the establishment of a segregated portfolio company, which allows compartmentalisation of assets/liabilities across investor groups. This is ideal for multi-strategy funds or employee co-investment tranches and employee co-investment vehicles.

Venture capital portfolio companies will not offer shares to the public unless participating in an IPO (in which case the relevant listing rules and obligations will apply). Shares may not be offered to the general public in the Cayman Islands.

The Cayman Islands does not have a general foreign direct investment regime and there are no restrictions on foreign ownership of land or real estate in the Islands.

Specific rules apply to foreign ownership and control of local businesses. The Local Companies (Control) Act (as revised) typically requires that 60% of the ownership interests in the local business be held/controlled by Caymanians. Furthermore it will be necessary to apply for a trade and business licence.

Such restrictions do not apply to Cayman Islands-based entities that conduct business exterior to the Cayman Islands.

Investments into locally licensed and regulated businesses are subject to approval by the Cayman Islands Monetary Authority, including ensuring that any such persons are fit and proper to make such investment. 

There are currently no foreign exchange controls or foreign exchange regulations.

Recent updates to the Beneficial Ownership Transparency Act mean that certain individuals or entities who hold 25% or more of the issued share capital in a Cayman Islands entity will need to provide certain information for inclusion in that company’s beneficial ownership register. The information can include personal information such as full name, birth date/place and nationalities, but does not become publicly available. In certain circumstances, where one or more ultimate beneficial owners cannot be identified, the company may elect to record a senior managing official (ie, a director) as the beneficial owner or take another alternative route to compliance.

The economic substance regime also provides that, where Cayman Islands companies are conducting certain relevant activities, they must annually report their relevant income generated by that activity and satisfy an “economic substance test”, proving that they have adequate physical presence within the Islands. Investment funds are excluded from the economic substance regime.