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User 2 will retain the Edit & Share permission for all the subfolders of Folder 1. In other words, User 2’s permission cannot be changed for the subfolders of Folder 1.
Any subfolder of Folder 1 can be independently shared with additional users with different permission levels. For instance:
Folder 5 can be shared with User 3 with Read Only permission
Folder 3 can be shared with User 4 with Edit permission.
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Tips & Tricks
Create an empty folder, share that folder, and then add files once the share have been sent. (You can add content before sharing, but this can take longer due to file upload/sync operations that must complete first.)
If you plan to share a parent folder and subfolders within, share the parent folder first. If you share the subfolders first, you will be blocked from sharing the parent.
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