Drag-along & tag-along rights

Hi there!

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Did you make it through April Fools’ Day unscathed? Good. No fooling around here - we’re all about clarity. Let’s use that spring energy and dive into some new investment-related topics, shall we? This issue of our newsletter dives into another crucial fundraising terms: drag-along and tag-along rights.

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What are drag-along & tag-along rights?

A drag-along right allows majority owners to force minority shareholders to join them in the sale of a company. This lets the potential buyer acquire 100 % of the company and clear the cap table. This provision is useful for securing (and enforcing) a unanimous decision to sell the business.

A tag-along right protects minority shareholders by allowing them to join a sale initiated by majority owners. This ensures they can sell their shares under the same conditions as the majority owner(s) and avoid being left behind in a less comfortable position.

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Why does this matter?

For founders, these rights simplify the sale process, ensuring all shareholders cooperate during acquisition deals. Drag-along rights can facilitate a smooth transition to new ownership, while tag-along rights provide all shareholders with fair treatment.

For investors, these rights offer a balance of power. They protect their investment regardless of their shareholding size.

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Dos and don'ts

When navigating drag-along and tag-along rights, consider:

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Dos:

• define drag-along conditions (e.g. founder(s)’ decision or minimum threshold)
• use proportionate (pro rata) tag-along rights
• employ clear, bullet-proof language to avoid misinterpretation

Don'ts:

• use broad drag-along wording
• overcomplicate the structure of tag-along rights
• grant tag-along rights to investors only (can also protect founders in later stages)

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In a nutshell

Drag-along and tag-along rights play an important role in aligning the interests of all shareholders during company transitions. They can speed up the sale process and provide fair treatment to all shareholders regardless of their ownership size.

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Want to learn more about these rights or other investment strategies? Reach out to our team for personalized advice and stay connected with us on LinkedIn for more insights.

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Bye for now!

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