What are Drag-Along Rights?
Drag-along rights allow a majority of shareholders (often investors) to force all other shareholders to participate in a sale. If a buyer wants 100% of the company and majority holders approve, minority holders must sell on the same terms.
Why Drag-Along Matters
Drag-along protects against holdout problems. Without it, a single shareholder could block an acquisition that benefits everyone else. Buyers typically require 100% ownership, so drag-along ensures deals can close.
For founders, drag-along is standard and generally reasonable. The protection is mutual: it prevents small shareholders from blocking beneficial exits. Just ensure the threshold requires meaningful consensus.
Typical Thresholds
Drag-along usually requires approval by holders of a majority of preferred stock plus either the board or a majority of common stock. This ensures neither founders nor investors can unilaterally force a sale.
Formula
Drag-Along Trigger: Typically requires approval of:
- Majority of preferred shareholders
- Plus majority of common shareholders OR board approval
Example
Your SaaS company receives a $50M acquisition offer:
- Investors (preferred): 40% ownership, unanimously approve
- Founders (common): 45% ownership, approve
- Early employee (common): 15% ownership, refuses
With drag-along rights, the 15% holdout must sell because majority of both preferred and common approved. Without drag-along, this single holdout could block the entire deal.