VC and angel investors are likely to want ‘customary drag and tag provisions’ in relation to a capital raise for your startup. We’ve explained below what these provisions mean for you.
Drag along rights
Drag along rights enable a majority shareholder to force a minority shareholder to join in a sale of the company. In other words, minority shareholders not involved in the sale are dragged along on the sale.
Drag along rights are designed to protect the majority shareholder and as they enable the sale of the whole company by buying out minority shareholders. Your investors who are likely to be the majority shareholders as your startup progresses will consider these rights to be important.
Tag along rights
Tag along rights give the minority shareholder the right to sell its stake in the company by joining a majority shareholder selling its stake.
Tag alongs, in effect, oblige the majority shareholder to include minority shareholders in any sale negotiations. This is important for you as the founder since your investor often has better access to potential buyers, and may be able to negotiate better pricing and terms.
Co-sale rights are similar to tag along rights, but applies when a majority shareholder is selling only a proportion of its shares. The sale is made conditional on an offer being made to minority shareholders to sell the same proportion of their shares.
One issue is that the buyer can end up with a large majority interest in the company, which may unsettle the remaining shareholders and may mean a new board of directors is on the way.
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