What is drag-along rights?

Full Explanation

In an exit scenario (acquisition, IPO, or secondary sale), majority investors want certainty that all shareholders will sell together. Without drag-along rights, a minority founder or employee could refuse to sell, blocking or delaying the transaction. Drag-along clauses (common in Series A+ term sheets) permit holders of a specified majority (typically 50% or more) to force all other shareholders to participate in the exit on the same per-share terms. This aligns incentives: if the majority is happy with the deal, it goes through. From a founder perspective, drag-along is concerning if you hold minority equity (you could be forced to sell at a price you dislike) but reassuring if you hold majority (it prevents a holdout blocking your preferred exit). The inverse is tag-along rights: if majority shareholders sell, minorities have the right to participate in the sale at the same price. Together, drag-along and tag-along create an efficient exit mechanism but founders should negotiate carve-outs (e.g., founder non-compete is paid separately, retention bonuses for staying post-close).

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