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.
Further Reading
- Private contracting and corporate governance: Evidence from the provision of tag-along rights in Brazil – www.sciencedirect.com [PDF]
- Specific investments, opportunism and corporate contracts: a theory of tag-along and drag-along clauses – link.springer.com [PDF]
- The influence of the tag-along rights in the value of companies: an event study of the effects on the market and service companies – bibliotecadigital.fgv.br [PDF]
- The Influence of the Tag-Along Rights in the Value of Companies: An Event Study of the Effects on the Market and Service Companies – papers.ssrn.com [PDF]
- Venture capital exit rights – onlinelibrary.wiley.com [PDF]
- Análise da eficiência de normas societárias: emissão de preferenciais, tag along e composição do conselho fiscal – escholarship.org [PDF]
- Deal structuring in philanthropic venture capital investments: Financing instrument, valuation and covenants – link.springer.com [PDF]
- The tag along concern for the shareholder and firm's wealth-an empirical brazilian investigation of tobin'sq ratio and dividends – repositorio.ufu.br [PDF]
