What is tag-along rights?

Full Explanation

Tag-along rights allow minority shareholders to sell their shares on the same terms if majority shareholders execute a sale, preventing minorities from being left behind in a partial exit. Tag-along is the complement to drag-along. If a majority shareholder negotiates an exit at £10 per share, tag-along rights give minority shareholders the right to sell their shares at the same £10 price in the same transaction. Without tag-along, a majority shareholder could sell their stake to a buyer while minorities are stuck as minority shareholders in the acquiring entity or a less-desirable outcome. Tag-along protects minorities by ensuring they participate in favourable exit events. From a majority shareholder perspective, tag-along creates obligations but is standard and accepted. Most VC term sheets include both drag-along and tag-along in symmetric terms: the threshold for dragging is typically 50% or more (of preferred stock or overall), and tag-along rights apply to all minority shareholders. Founders should ensure that tag-along rights apply to themselves and employees, not just VCs. Related concepts in the venture capital ecosystem include cap table management, employee option pool allocation, and the interaction between equity terms and convertible instruments (SAFEs, convertible notes, and advance subscription agreements). Each of these topics connects to how ownership and value are distributed across stakeholders. For UK-based companies, the tax implications of share schemes — particularly EMI options — add another layer of complexity that interacts with the economic terms of each funding round.

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