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Tag-Along Rights

What are 'Tag-Along Rights'

Tag-along rights, also referred to as "co-sale rights," are contractual obligations used to protect a minority shareholder, usually in a venture capital deal. If a majority shareholder sells his take, it gives the minority shareholder the right to join the transaction and sell his minority stake in the company. Tag-alongs effectively oblige the majority shareholder to include the holdings of the minority holder in the negotiations in order to facilitate the possibility that a tag-along right is exercised.

Explaining 'Tag-Along Rights'

Tag-along rights are pre-negotiated rights that a minority shareholder includes in his initial issuance of a company's stock. These rights allow a minority shareholder to sell his share if a majority shareholder is negotiating a sale for his stake. Tag-along rights are prevalent in startup companies and other private firms with considerable upside potential.

An Example of Tag-Along Rights

Cofounders, angel investors and venture capital firms alike often rely on tag-along rights. Let's say, for example, that three cofounders launch a new tech company. The business is going well and the cofounders believe that they've proven the concept enough to scale, and seek outside investments in the form of a seed round. A private equity angel investor sees the value of the company and offers to purchase 60% of the company, requiring a large amount of equity to compensate for the risk of investing in the small company. The cofounders accept the investment, making the angel investor the largest shareholder.


Further Reading


Private contracting and corporate governance: Evidence from the provision of tag-along rights in Brazil
www.sciencedirect.com [PDF]
… iii) results - positive influence of family control on DCP and different results regarding the voluntary granting of tag along rights … Quarterly Journal of Economics, 110(4), 1047-1073 and Cox, S., & Roden, D. (2002 … The source of value of voting rights and related dividend promises …

Specific investments, opportunism and corporate contracts: a theory of tag-along and drag-along clausesSpecific investments, opportunism and corporate contracts: a theory of tag-along and drag-along clauses
link.springer.com [PDF]
… iii) results - positive influence of family control on DCP and different results regarding the voluntary granting of tag along rights … Quarterly Journal of Economics, 110(4), 1047-1073 and Cox, S., & Roden, D. (2002 … The source of value of voting rights and related dividend promises …

The influence of the tag-along rights in the value of companies: an event study of the effects on the market and service companiesThe influence of the tag-along rights in the value of companies: an event study of the effects on the market and service companies
bibliotecadigital.fgv.br [PDF]
… iii) results - positive influence of family control on DCP and different results regarding the voluntary granting of tag along rights … Quarterly Journal of Economics, 110(4), 1047-1073 and Cox, S., & Roden, D. (2002 … The source of value of voting rights and related dividend promises …

The Influence of the Tag-Along Rights in the Value of Companies: An Event Study of the Effects on the Market and Service CompaniesThe Influence of the Tag-Along Rights in the Value of Companies: An Event Study of the Effects on the Market and Service Companies
papers.ssrn.com [PDF]
… iii) results - positive influence of family control on DCP and different results regarding the voluntary granting of tag along rights … Quarterly Journal of Economics, 110(4), 1047-1073 and Cox, S., & Roden, D. (2002 … The source of value of voting rights and related dividend promises …

Venture capital exit rightsVenture capital exit rights
onlinelibrary.wiley.com [PDF]
… iii) results - positive influence of family control on DCP and different results regarding the voluntary granting of tag along rights … Quarterly Journal of Economics, 110(4), 1047-1073 and Cox, S., & Roden, D. (2002 … The source of value of voting rights and related dividend promises …

Análise da eficiência de normas societárias: emissão de preferenciais, tag along e composição do conselho fiscalAnálise da eficiência de normas societárias: emissão de preferenciais, tag along e composição do conselho fiscal
escholarship.org [PDF]
… iii) results - positive influence of family control on DCP and different results regarding the voluntary granting of tag along rights … Quarterly Journal of Economics, 110(4), 1047-1073 and Cox, S., & Roden, D. (2002 … The source of value of voting rights and related dividend promises …

Deal structuring in philanthropic venture capital investments: Financing instrument, valuation and covenantsDeal structuring in philanthropic venture capital investments: Financing instrument, valuation and covenants
link.springer.com [PDF]
… iii) results - positive influence of family control on DCP and different results regarding the voluntary granting of tag along rights … Quarterly Journal of Economics, 110(4), 1047-1073 and Cox, S., & Roden, D. (2002 … The source of value of voting rights and related dividend promises …

The tag along concern for the shareholder and firm's wealth-an empirical brazilian investigation of tobin'sq ratio and dividendsThe tag along concern for the shareholder and firm's wealth-an empirical brazilian investigation of tobin'sq ratio and dividends
repositorio.ufu.br [PDF]
… iii) results - positive influence of family control on DCP and different results regarding the voluntary granting of tag along rights … Quarterly Journal of Economics, 110(4), 1047-1073 and Cox, S., & Roden, D. (2002 … The source of value of voting rights and related dividend promises …



Q&A About Tag-Along Rights


What does a tag-along right do?

A tag along right obliges the majority shareholder to include the holdings of the minority holder in negotiations.

How can an angel investor use a tag-along right?

An angel investor with a large stake in the company may want to sell some of his shares but not all of them. He may want to keep some shares so that he can continue advising and helping grow the company. In this case, he would have to offer up his shares for sale as well if he wanted to sell any part of them because it would be unfair for him alone to be able answer questions about why he was selling his shares without offering up everyone else's as well. This is where a tag along comes into play because it forces him to offer up all shareholders' stakes for sale at once so that no one person has special privileges over another when it comes time to decide whether or not they will sell their shareholdings."

Who uses tag-along rights?

Cofounders, angel investors and venture capital firms use tag along rights.

How can a cofounder use a tag-along right?

If an investor wants to buy out one or more cofounders, they can exercise their tag along right and join in on the deal.

Why might you need a cofounder's permission before selling your stake in your business?

You might need permission from your cofounder(s) before selling your stake in your business because you might have signed contracts stating that you cannot sell without permission from other shareholders first (i.e., "tag along" agreements).

What is tag-along rights?

Tag along rights are contractual obligations.