Drag-along / Tag-along Rights
Quick Definition
Drag-along lets majority shareholders force minority shareholders to join a sale; tag-along lets minority shareholders join a sale on the same terms as the majority.
What Is Drag-along / Tag-along Rights?
Drag-along and tag-along rights are two sides of the same coin — both deal with what happens when some shareholders want to sell the company and others might not.
Drag-along rights give majority shareholders (usually the investors and/or founders who collectively own more than 50%) the power to force all other shareholders to sell their shares in a company acquisition. If a buyer wants to acquire 100% of the company and the majority agrees to the deal, drag-along provisions ensure that minority shareholders can't block the sale by refusing to sell. The minority shareholders get the same price and terms as everyone else — they just don't get to say no.
Tag-along rights (also called co-sale rights) protect minority shareholders. If a majority shareholder is selling their shares to a third party, tag-along rights let minority shareholders join the sale on the same terms and at the same price. This prevents a scenario where majority shareholders sell their stake at a premium and leave minority shareholders stuck holding illiquid shares in a company with new, unknown owners.
Both provisions are standard in venture capital deals and are included in most shareholders' agreements. They create a fair framework for exits: drag-along ensures deals can get done, and tag-along ensures nobody gets left behind.
Why It Matters for Startups
As a founder, drag-along rights mean that if your investors (who often hold preferred stock with effective majority power through protective provisions) agree to a sale, you and your employees will participate whether you want to or not. Understanding these terms helps you negotiate the threshold (what percentage must agree to trigger drag-along) and the conditions (minimum price, time limits). Tag-along rights protect you too — if a major investor is selling their stake, you have the right to sell alongside them rather than being stuck with an unknown new shareholder.
Example
A buyer offers $30M for your startup. Investors holding 60% of the voting power agree to the deal. You (the founder) own 25% and aren't sure about the price — you think the company could be worth $50M in two years. But the drag-along provision requires you to sell at $30M alongside the majority. You receive $7.5M for your shares (25% of $30M after preferences). Separately, tag-along protects an angel investor holding 3% — if the lead VC was selling their shares privately, the angel can join on identical terms.
Key Takeaways
- ✅ Drag-along lets the majority force a sale — minority shareholders must participate
- ✅ Tag-along lets minority shareholders join a sale on equal terms to the majority
- ✅ Both are standard in venture deals and protect different parties
- ✅ Negotiate the trigger threshold for drag-along — 50% vs two-thirds vs board majority makes a big difference
How Holdings Helps
Holdings helps startups maintain organized shareholder records — making exit scenarios easier to model and negotiate.
Related Terms
Term Sheet
A non-binding document outlining the key financial and governance terms of a proposed investment — the starting point for fundraising negotiations.
Liquidation Preference
A term that guarantees investors get their money back (often with a multiple) before common shareholders receive anything in a sale or liquidation.
Right of First Refusal (ROFR)
A right that lets the company or existing investors buy shares before a shareholder can sell them to an outside third party.
Common Stock vs Preferred Stock
Common stock is held by founders and employees with basic ownership rights; preferred stock is held by investors and comes with special protections like liquidation preference.
Anti-dilution Provisions
Clauses that protect preferred investors from losing value if the company raises a future round at a lower valuation (a down round).
Right of First Refusal (ROFR)
A right that lets the company or existing investors buy shares before a shareholder can sell them to an outside third party.
Explore More startup Terms
Browse our complete financial glossary designed specifically for startups.
View All startup Terms →