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Drag-Along Rights
Rights allowing majority shareholders to force minority shareholders to join in the sale of a company.
Formula
Typical thresholds:
- Majority of preferred + common voting together
- Or specific percentage (60%, 66%, 70%)
- Often requires board approval as well
Definition
What are Drag-Along Rights?
Drag-along rights let majority shareholders (usually defined as a supermajority like 60-70%+) compel all other shareholders to participate in a sale on the same terms.
Why Drag-Alongs Exist
Buyers want 100% of a company. Without drag-along, minority holdouts could block deals. Drag-alongs ensure deals can close without unanimous consent.
Founder Considerations
Drag-alongs protect deal flow but can force you into exits you don't want. Pay attention to the threshold and ensure board approval is also required.
Example
Company receives acquisition offer at $50M.
- Investors (40% ownership) want to sell
- Founders (35% ownership) want to sell
- Employees (25% ownership) are unsure
With drag-along at 60% threshold:
75% approval triggers drag-along. All shareholders must sell at the same $50M terms.
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