Drag-Along and Tag-Along Rights

Drag-along lets majority shareholders force minority shareholders to participate in a sale on the same terms. Tag-along lets minority shareholders join a sale if majority shareholders are selling. Together they protect both sides in exit scenarios.

Why it matters

Without drag-along rights, a single minority shareholder can block an acquisition by refusing to sell, even when the vast majority of shareholders want the deal. This is a serious problem because most acquirers want to buy 100% of a company. A single disgruntled former co-founder holding 5% can derail a $50M acquisition for everyone else.

Without tag-along rights, majority shareholders could sell their shares and leave minority shareholders trapped in a company with new owners they did not choose. A co-founder holding 20% could watch the other founder sell 51% to a private equity firm, leaving them with a minority stake in a company now run by people they never agreed to work with.

These paired provisions ensure that exit events are fair and efficient for everyone on the cap table. They're not adversarial clauses — they're the infrastructure that makes clean exits possible.

How it works

Drag-along rights give a specified majority (usually holders of a majority of the outstanding shares, or sometimes a supermajority like 66%) the power to compel all other shareholders to sell their shares in a transaction on the same terms and at the same price per share. For example, if founders and investors holding 80% of shares agree to sell the company for $50 million, drag-along rights force the remaining 20% to sell at the same price per share. The minority shareholders must participate and cannot hold out for better terms or block the deal.

Tag-along rights work in the opposite direction. If a majority shareholder finds a buyer for their shares, minority shareholders can exercise their tag-along rights to include their shares in the transaction on the same terms. This prevents a scenario where the controlling shareholders sell to a new owner and leave the minority holders behind. For instance, if a founder who owns 60% of the company gets an offer to sell their shares, a co-founder with 15% can tag along and sell their proportional share in the same transaction at the same price. Both provisions are standard in shareholder agreements and in the voting agreement that comes with a Series A financing.

History and origin

Drag-along and tag-along rights emerged from private equity and leveraged buyout structures in the 1970s and 1980s, where complex ownership arrangements made clean exits difficult. As venture capital adopted these structures in the 1990s, they became standard components of term sheets and shareholder agreements across the startup ecosystem.

The National Venture Capital Association (NVCA) model term sheet documents, which became a widely adopted standard in the 2000s, codified drag-along and tag-along rights as expected provisions in any Series A financing. Their inclusion became so standard that their absence now raises questions.

Several high-profile acquisition attempts that were blocked or complicated by minority shareholders without drag-along rights in the 1990s and early 2000s reinforced how critical these provisions were. Acquirers began refusing to structure deals without them, making drag-along rights a practical necessity for any company planning a future exit.

Frequently asked questions

What are drag-along rights?

Drag-along rights give a majority of shareholders the power to compel all other shareholders to sell their shares in an acquisition on the same terms. This prevents a single minority shareholder from blocking a deal that the majority wants. Most acquirers require 100% of shares, so drag-along rights are essential for any company planning to exit via acquisition.

What are tag-along rights?

Tag-along rights (also called co-sale rights) give minority shareholders the right to participate in a sale if majority shareholders are selling. If a majority holder finds a buyer for their shares, minority shareholders can "tag along" and sell their proportional stake at the same price and terms. This protects minorities from being left behind with new owners they didn't choose.

Who typically holds drag-along rights?

Drag-along rights are usually triggered by a majority vote of all shareholders, or sometimes a majority of preferred stockholders and a majority of common stockholders voting separately. They appear in the voting agreement or shareholder agreement negotiated at the time of a Series A or later investment. The specific majority threshold (simple majority, 60%, 66%) is a negotiating point.

Can minority shareholders be forced to sell at a bad price?

In theory, drag-along rights can force minority shareholders to sell at whatever price the majority agrees to. In practice, all shareholders receive the same price per share for their class of stock. However, the majority can agree to terms that may not maximize exit proceeds — like accepting stock in the acquirer instead of cash — and minorities must go along. See our founder agreements guide for how to negotiate protections upfront.

Are drag-along and tag-along rights standard in startup documents?

Yes. Drag-along and tag-along rights are standard provisions in the voting agreements and investor rights agreements that accompany Series A and later financings. They are also common in co-founder and shareholder agreements at the seed stage. Most startup attorneys and VCs consider them non-negotiable components of a properly structured cap table.

What is the difference between tag-along rights and right of first refusal?

Right of first refusal (ROFR) gives the company or existing shareholders the right to buy shares before they're sold to a third party. Tag-along rights don't give you the right to buy — they give you the right to join the sale and sell your own shares alongside the majority holder. Both protect minority shareholders but in different ways: ROFR controls who can buy shares, while tag-along rights ensure minorities aren't left behind in an exit.

Do drag-along rights apply to IPOs?

Drag-along rights typically apply to acquisition transactions, not IPOs. An IPO is a share sale by the company (or existing shareholders in a secondary offering), not a change-of-control transaction that would require all shareholders to participate. Most drag-along clauses specifically define the triggering events, which typically include merger, asset sale, or sale of a majority stake — but not an initial public offering.

Learn more

• Founder agreements: what to include
• What investors look for in cap tables
• What is a cap table and why does it matter?

Related terms

• Shareholder Agreement
• Right of First Refusal (ROFR)
• Liquidation Preference
• Liquidity Event
• Cap Table