Term sheet clauses
A drag-along right lets a defined majority of shareholders force the remaining shareholders to join a sale of the company on the same terms, preventing a small holder from blocking an exit.
Buyers usually want 100% of a company, not 94%. Without a drag-along, a handful of minority shareholders, former employees or an unreachable angel could stall an acquisition or extract a premium for consenting.
The drag-along sets a threshold, commonly a majority of preferred plus a majority of common, or a defined percentage of the whole cap table. Once that threshold approves a sale, everyone else is contractually obliged to sell on identical terms.
The protections that matter to a minority holder are the threshold itself, a requirement that terms be genuinely identical for all shares of the same class, and limits on the representations and warranties a dragged shareholder can be forced to give.
Drag-along and tag-along are usually drafted together. The drag protects the majority's ability to sell; the tag protects the minority's right to join a sale they did not initiate.
A drag-along forces minority holders into a sale the majority has agreed. A tag-along lets minority holders join a sale the majority is making, so they are not left behind holding illiquid stock.
Yes, if the founder's holding is below the drag threshold. This is why founders should look closely at the threshold before signing, particularly after later rounds have diluted them.
Yes. Almost every venture financing includes one, because acquirers will not proceed without a mechanism to reach full ownership.
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