What are drag-along rights and when are they exercised?
Short Answer
Drag-along rights allow majority shareholders (often preferred investors) to force minority shareholders (usually founders) to sell their shares in an acquisition, preventing holdouts from blocking deals.
Full Explanation
Drag-along is typically triggered when holders of a majority of preferred shares (e.g., 50.1%) approve a sale. The minority (founders holding common shares or employees with options) must participate in the sale at the same valuation, even if they disagree. For example: investors own 60% of the company preferred; founders own 40% common. Investors approve a £10M acquisition. Drag-along forces founders to sell at the £10M price agreed by investors, even if founders believe the company is worth more. Drag-along is essential for investors because without it, a single founder could block an otherwise beneficial acquisition, holding the company (and other investors) hostage. From the founder perspective, drag-along is the downside of taking institutional capital — you lose unilateral control over exit decisions. However, the price is typically fair-market value agreed by sophisticated parties. Drag-along thresholds vary: some require only a super-majority of preferred (66%+), others require unanimous investor approval. For founders negotiating Series A, drag-along is virtually non-negotiable market-standard.
Related Glossary Terms
Related Questions
Dual-class shares grant unequal voting rights: founders hold Class A shares (10 votes each), public shareholders hold Cl...
Founder-friendly terms prioritise founder control and equity preservation: no anti-dilution, limited protective provisio...
Protective provisions grant preferred shareholders approval rights over major corporate actions (salary changes, major a...
Want to see these concepts in action?
Discover how the Opagio Growth Platform puts intangible asset theory into practice.