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Tag-Along Rights

Source: Investopedia
This Article has been Edited for Accessibility

Tag-Along Rights

What are 'Tag-Along Rights'

Tag-along rights, also referred to as "co-sale rights," are contractual obligations used to protect a minority shareholder, usually in a venture capital deal. If a majority shareholder sells his take, it gives the minority shareholder the right to join the transaction and sell his minority stake in the company. Tag-alongs effectively oblige the majority shareholder to include the holdings of the minority holder in the negotiations in order to facilitate the possibility that a tag-along right is exercised.

Explaining 'Tag-Along Rights'

Tag-along rights are pre-negotiated rights that a minority shareholder includes in his initial issuance of a company's stock. These rights allow a minority shareholder to sell his share if a majority shareholder is negotiating a sale for his stake. Tag-along rights are prevalent in startup companies and other private firms with considerable upside potential.

An Example of Tag-Along Rights

Cofounders, angel investors and venture capital firms alike often rely on tag-along rights. Let's say, for example, that three cofounders launch a new tech company. The business is going well and the cofounders believe that they've proven the concept enough to scale, and seek outside investments in the form of a seed round. A private equity angel investor sees the value of the company and offers to purchase 60% of the company, requiring a large amount of equity to compensate for the risk of investing in the small company. The cofounders accept the investment, making the angel investor the largest shareholder.


Additional Resources

  1. Legal Protection Of Minority Shareholders Of Listed Corporations In ... [digitalcommons.law.lsu.edu]
  2. Investor Rights In Non-listed Llcs [clsbluesky.law.columbia.edu]
  3. The Relevance Of Tag Along Rights And Identity Of Controlling ... [academia.edu]
  4. Venture Capital Terms [nutsandbolts.mit.edu]