What is Drag-Along Rights?

Drag-Along Rights are a provision in a shareholders' agreement that allows a majority shareholder (or a group of majority shareholders) to force a minority shareholder to join in the sale of a company. This ensures that a potential acquirer can buy 100% of the company.

Base Term for Startups: This is a crucial clause for ensuring a clean exit. Without it, a single small shareholder could potentially block an acquisition that is favored by the founders and majority investors.

For Investors & Founders: Both founders and lead investors typically want this clause to prevent minority shareholders from holding a deal hostage.

Base Term Example: The founders and investors, who collectively own 80% of a startup, approve a sale to Google. The drag-along clause forces the remaining 20% of shareholders to sell their shares under the same terms, allowing the acquisition to proceed smoothly.