Drag-Along Rights
A provision letting a majority of shareholders force minority shareholders to join in an approved sale of the company.
Drag-along rights let a defined majority of stockholders (often preferred holders plus a majority of common, or simply a board and stockholder majority) compel all remaining shareholders to sell their shares on the same terms if the company agrees to an acquisition. Without this provision, a small holdout shareholder could theoretically block or complicate a deal the rest of the company wants.
The clause exists to prevent deal friction — an acquirer generally wants to buy 100% of the company cleanly, and a handful of dissenting small holders (early employees, angels) could otherwise slow or derail closing. It's standard in nearly every venture financing and rarely a point of real negotiation beyond the exact voting threshold required to trigger it.
Drag-along rights usually live in the financing documents — commonly the voting agreement in the standard venture document set — and stockholders agree to them when they invest. That means founders and early holders effectively pre-consent to being dragged years before any sale is on the table.
The trigger is where the negotiation happens. Investor-friendly versions trigger on a vote of the preferred alone; founder-friendly versions also require board approval and a majority of common. A preferred-only trigger lets investors force an exit that founders and common holders oppose.
A drag-along compels participation on the same terms as everyone else; it doesn't guarantee those terms are good. If liquidation preferences consume most of the proceeds, common holders can be dragged into a sale that pays them little or nothing.
Hypothetically: preferred holders approve a $40M acquisition, and the company's 1x liquidation preferences total $35M. If the drag-along triggers on a majority of preferred alone, the founders must sell on the same terms even if they vote no — and common holders split only the remaining $5M. Require a majority of common as well, and the founders keep a vote on whether the sale happens at all.
Make sure the drag-along threshold in your certificate of incorporation is reasonable (majority of both preferred and common, not preferred alone) so a coalition of investors can't force a sale that common stockholders and founders oppose.
Can drag-along rights force a founder to sell against their will?
Yes, if the required voting threshold approves the sale — that's the entire point of the provision, which is why the threshold itself (who has to agree) is worth scrutinizing in the term sheet.
What's the difference between drag-along and tag-along rights?
They pull in opposite directions. A drag-along lets a majority force the minority to sell into a whole-company deal. A tag-along (co-sale) right lets a minority holder join a sale the majority is making, on the same terms. Most term sheets carry both.
Where does the drag-along clause appear in financing documents?
Usually in the voting agreement, sometimes in a stockholder or investor rights agreement. Stockholders sign it at the time of the financing.
Related terms
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