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.
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