From time to time, we receive questions from new angel investors asking about specific terms in investment agreements and how they apply when triggered. To address these inquiries, we have a series of articles on “Understanding Deal Terms“, explaining the key investment terms. Whether you’re new to investing or just need a refresher, we hope you’ll find this series useful in understanding deal terms.
What Are Drag-Along Rights?
Drag-along rights are provisions that allow majority shareholders to force minority shareholders to join in the sale of a company under the same terms and conditions. The primary purpose of drag-along rights is to simplify the process of selling a company by ensuring that a potential buyer can acquire 100% of the company without any holdouts from minority shareholders.
How Drag-Along Rights Work
Here’s a typical scenario: Suppose the majority shareholders (who hold, for example, 60% of the company’s shares) have found a buyer who is willing to purchase the entire company. However, the buyer wants to acquire 100% of the company to have full control. Drag-along rights allow these majority shareholders to compel the minority shareholders (who hold the remaining 40% of shares) to sell their shares to the buyer on the same terms and conditions.
Example: If a company is being sold for $10 million, and the buyer is paying $100 per share, drag-along rights would ensure that all shareholders, including minority shareholders, must sell their shares at $100 per share, provided that the majority shareholders agree to the sale.
Why Drag-Along Rights Matter
Drag-along rights are essential for several reasons:
- Facilitating Smooth Exits: Drag-along rights ensure that a buyer can purchase the entire company without the complication of minority shareholders refusing to sell. This makes the company more attractive to potential buyers.
- Ensuring Equal Treatment: Drag-along rights require that minority shareholders receive the same terms and conditions as the majority shareholders. This prevents situations where minority shareholders could be offered less favorable terms in a sale.
- Streamlining Decision-Making: By allowing the majority to make decisions on behalf of all shareholders, drag-along rights streamline the sale process and reduce the risk of deal disruptions.
What Are Tag-Along Rights?
Tag-along rights, sometimes referred to as “co-sale rights,” are the mirror image of drag-along rights. These rights allow minority shareholders to join in the sale of shares by majority shareholders, ensuring that they can “tag along” and sell their shares on the same terms and conditions.
How Tag-Along Rights Work
If the majority shareholders decide to sell a portion of their shares to a buyer, minority shareholders with tag-along rights have the option to participate in the sale. This means they can sell their shares at the same price and on the same terms as the majority shareholders.
Example: If the majority shareholders plan to sell 50% of their shares for $100 per share, tag-along rights allow the minority shareholders to sell a proportional number of their shares at the same price.
Why Tag-Along Rights Matter
Tag-along rights are crucial for protecting minority shareholders in several ways:
- Protecting Minority Interests: Tag-along rights prevent minority shareholders from being left behind when majority shareholders sell their shares. This ensures that minority shareholders have the opportunity to realize the same gains as the majority shareholders.
- Ensuring Fairness: By allowing minority shareholders to sell their shares on the same terms as the majority, tag-along rights help ensure that all shareholders are treated equally in the event of a sale.
- Avoiding Disproportionate Control: Without tag-along rights, majority shareholders could sell a controlling interest in the company without providing an opportunity for minority shareholders to exit on the same terms, potentially leaving them with diminished influence and value.
Join Us for a Deeper Dive into Deal Terms
If you’re interested in gaining a more comprehensive understanding of tag along and drag along rights and other deal terms, don’t miss our upcoming AngelCentral MasterClass Series: Implications of Deal Terms Using Real World Case Studies on 19 July 2025 (Saturday).
This workshop will provide you with practical insights into how these terms are applied in real-world scenarios, equipping you with the knowledge to understand the implications and negotiate effectively.
This post is a part of the series of “Understanding Deal Terms”, find out more about the explanation of other deal terms:
1 thought on “Understanding Deal Terms: Drag-Along and Tag-Along Rights”