Drag-Along Rights

Quick Definition

A provision allowing majority shareholders to force minority shareholders to join in the sale of a company.

What are Drag-Along Rights?

Drag-along rights allow a majority of shareholders (often investors) to force all other shareholders to participate in a sale. If a buyer wants 100% of the company and majority holders approve, minority holders must sell on the same terms.

Why Drag-Along Matters

Drag-along protects against holdout problems. Without it, a single shareholder could block an acquisition that benefits everyone else. Buyers typically require 100% ownership, so drag-along ensures deals can close.

For founders, drag-along is standard and generally reasonable. The protection is mutual: it prevents small shareholders from blocking beneficial exits. Just ensure the threshold requires meaningful consensus.

Typical Thresholds

Drag-along usually requires approval by holders of a majority of preferred stock plus either the board or a majority of common stock. This ensures neither founders nor investors can unilaterally force a sale.

Formula
Drag-Along Trigger: Typically requires approval of:

• Majority of preferred shareholders
• Plus majority of common shareholders OR board approval

Example
Your SaaS company receives a $50M acquisition offer:

• Investors (preferred): 40% ownership, unanimously approve
• Founders (common): 45% ownership, approve
• Early employee (common): 15% ownership, refuses

With drag-along rights, the 15% holdout must sell because majority of both preferred and common approved. Without drag-along, this single holdout could block the entire deal.

Related Terms

Tag-Along Rights
A provision allowing minority shareholders to join a sale if majority shareholders sell their stake.
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Right of First Refusal (ROFR)
The right to match any offer a shareholder receives before they can sell to a third party.
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Liquidation Preference
The right of preferred shareholders to receive their investment back before common shareholders in a sale or liquidation.
Learn more

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