Drag-along rights allow majority shareholders to force minority shareholders to participate in a sale of the company on the same terms. They prevent minority holders from blocking a transaction that the majority has approved. Standard in most venture financing, drag-along is typically triggered when holders of a specified percentage of shares (usually 50-70% of preferred plus common) vote to approve a sale.
Drag-along rights prevent minority shareholders from blocking a sale that the majority wants. Without them, a small shareholder could hold up an acquisition.
Standard in most venture deals. Protects both investors (who may want to sell) and founders (who may want to sell over investor objections, depending on the threshold).
If shareholders holding more than the threshold (typically 50-70% of preferred + common, or sometimes just preferred) approve a sale, all other shareholders must sell on the same terms.
The dragged shareholders receive the same price per share and terms as the majority.
Not understanding the approval threshold. Who has the power to trigger drag-along varies by deal.
Drag-along combined with liquidation preferences can mean common shareholders get little in a modest exit.
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