A capital raise for your business is likely to include ‘customary drag and tag provisions’ in relation to VC and angel investors. We’ve outlined below what these clauses imply for you.
What are drag and tag rights?
If a minor shareholder refuses to sell their shares, they are dragged along with the larger investor. The tag along provision allows the minor stockholder to join in on a sale if permitted by the parent company. Both clauses are intended to grant the tiny stockholder the same rights as any other seller when it comes to receiving the same price, terms, and conditions in a transaction.
Your tag along rights
A minority owner’s stake in a company may be sold through a partnership or affiliate membership by organizing with a majority owner to sell his or her shares.
By including minority shareholders in any deal discussions, the majority owner puts them in a position of power. This is significant for you as the creator since your company’s value is directly related to the number and quality of your shareholders.
When it comes to a sale, you as the majority owner have the right to offer the minority owner’s shares at the same price, terms, and conditions as offered to any other party. This is known as tag along rights.
Your drag along rights
A majority owner can drag along a minority owner to force them to participate in the company’s sale if they have rights that allow for this. In other words, if the majority owner wants to sell their shares, they can require the minority owner to sell theirs as well.
On the other hand, drag along rights are intended to safeguard the majority owner and thereby allow for the sale of the entire firm by purchasing out minority stockholders. As your company grows, your investors who are most likely to be the majority owners will value these privileges.
What about co-sale rights?
A co-sale right is similar to a tag along right, but it applies when the majority owner sells only a portion of its shares. The transaction is made contingent on an invitation being extended to minor shareholders to sell the same proportion of their stock as the majority owner.
How to block a sale as a minority shareholder
All company shares are tradeable if the majority agree to a transaction, thanks to tag and drag along rights. This can prevent a small shareholder from stalling a sale by keeping them in the deal on identical terms, allowing for a buyout of the complete business.
