What is a co-sale right (tag-along right for shareholders)?

Full Explanation

Co-sale rights allow shareholders to participate in a sale of the company on the same terms negotiated by majority shareholders, preventing discrimination against minorities. Co-sale differs from tag-along (which applies to external sales of the company) because it applies to secondary sales of shares. If a founder or early investor receives an offer to sell shares, co-sale rights allow other shareholders to sell alongside them at the same price. Example: a founder wants to sell 10% of the company to a secondary buyer at £2/share. Other shareholders (including employees with vested options) can exercise co-sale to sell their shares at the same £2/share price. Co-sale is important for employee retention: without it, founders and early investors could sell at premium prices whilst employees are stuck holding illiquid shares at lower valuations. Co-sale is standard in Series A and later rounds. The threshold is typically 1-5% (any holder selling above that threshold triggers co-sale for other shareholders). For companies planning M&A or secondary sales, understanding who has co-sale rights is critical to deal structure. Understanding the legal and economic terms in venture capital agreements is essential for founders because these terms directly affect how value is distributed at exit. The headline valuation — pre-money or post-money — is only one dimension. Liquidation preferences, participation rights, anti-dilution provisions, and protective covenants can collectively shift millions of pounds between shareholders in exit scenarios. Founders who understand these mechanics negotiate better outcomes and avoid surprises when a transaction closes.

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