What Are Tag-Along Rights In Venture Capital?
Tag-along rights or “co-sale rights” are a provision in venture capital and shareholder agreements that protect minority shareholders, typically investors, by allowing them to join in the sale of their shares when a majority shareholder decides to sell their shares to a third party.
Tag-along rights ensure that minority shareholders have the option to sell their shares on the same terms and conditions as the majority shareholder, effectively “tagging along” in the transaction.
An example of a tag-along right clause in a shareholder agreement might read as follows:
“If [majority shareholder’s name] intends to sell any of their shares of the Company to a third party, the minority shareholders shall have the right to ‘tag along’ and include their shares in the proposed sale. The terms and conditions of such sale, including the purchase price and other material terms, shall be the same for the minority shareholders as for the majority shareholder.”
What Is Tag Along In Startup Terms?
In the startup context, “tag along” refers to the ability of minority shareholders, typically early-stage investors, to join in the sale of their shares when a majority shareholder or a founder decides to sell their shares to an external party.
This right ensures that minority shareholders have the option to sell their shares under the same terms and conditions as the majority shareholder, providing them with some degree of protection and allowing them to realise the same benefits from the sale.
What Are Drag-Along Rights For Founders?
Drag-along rights are a provision in shareholder agreements that benefit the majority shareholders, often founders or controlling stakeholders. These rights enable majority shareholders to force minority shareholders to join in the sale of the company to a third party on the same terms and conditions.
Drag-along rights are used to facilitate the sale of a company by ensuring that all shareholders are bound by the decision of the majority, which can be essential in exit scenarios or when a buyer seeks a complete acquisition.
What Is The Difference Between Tag-Along And Drag-Along Rights?
- Tag-Along Rights: These protect minority shareholders (often investors) by allowing them to join the sale of their shares when a majority shareholder decides to sell their shares to a third party. The purpose is to ensure that minority shareholders can realise the same benefits and terms as the majority shareholder.
- Drag-Along Rights: These benefit majority shareholders, typically founders or controlling stakeholders, by allowing them to force minority shareholders to participate in the sale of the company to a third party on the same terms and conditions. Drag-along rights help facilitate the sale of the entire company by ensuring that all shareholders are bound by the decision of the majority.
