Tag-Along Rights | Futureproof
Tag-Along Rights
Quick Definition
A provision allowing minority shareholders to join a sale if majority shareholders sell their stake.
What are Tag-Along Rights?
Tag-along rights (also called co-sale rights) allow minority shareholders to participate in a sale when majority shareholders sell their shares. If a founder sells to a buyer, other shareholders can "tag along" and sell proportionally on the same terms.
Why Tag-Along Matters
Tag-along protects minority shareholders from being left behind in a company with new controlling owners they did not choose. It ensures everyone gets the same opportunity to exit.
For investors, tag-along prevents founders from selling their shares to a strategic buyer while leaving investors stuck in an illiquid position with new owners they have no relationship with.
How Tag-Along Works
If a founder negotiates to sell 50% of their shares, investors can require the buyer to purchase the same percentage of their shares on identical terms. The buyer must accommodate this or the deal cannot proceed.
Formula
Tag-Along Calculation:
If selling shareholder sells X% of their shares,
Tag-along holders can sell X% of their shares on same terms
Example
Your SaaS company founder wants to sell half their shares:
- Founder owns: 60% (wants to sell 30% to secondary buyer)
- Investor owns: 25% with tag-along rights
With tag-along, investor can require the buyer to also purchase 50% of their stake (12.5%) on the same terms. The buyer must buy 42.5% total or the founder cannot complete their sale.