Drag-Along Rights

Drag-along rights give majority shareholders (or a specified threshold, such as holders of a majority of preferred stock) the power to compel all other shareholders to participate in a sale of the company on the same terms. This prevents minority shareholders from blocking an acquisition that the majority supports.

Drag-along rights are essential for clean exits. Without them, a single dissident shareholder could hold up or kill a deal. Imagine a scenario where 95% of shareholders approve a $100M acquisition, but one angel investor with 2% refuses to sell. Drag-along rights force that 2% holder to participate, ensuring the deal can close.

While drag-along rights can feel coercive to minority holders, they include standard protections. The sale price must be the same for all shareholders (per share, by class), and the terms must be identical. Some drag-along provisions require a minimum price threshold to prevent majority shareholders from forcing a fire sale. Founders should pay attention to who triggers the drag-along: ideally, it requires both a majority of common AND a majority of preferred shareholders.