Tag Along rights, also known as co-sale rights, are a legal agreement commonly used in venture capital and private equity transactions. These rights protect minority shareholders by allowing them to sell their shares alongside majority shareholders if the majority shareholders decide to sell their stake.
What are Tag Along Rights?
Tag Along Rights are vital provisions in shareholders’ agreements. These rights become active when a majority shareholder decides to sell their stake, allowing minority shareholders to participate in the sale under the same conditions. This is especially important in situations where majority shareholders might access better terms or buyers, as it ensures that minority shareholders do not face a disadvantage or sell under less favorable terms.
Why Tag Along Rights are Important
Tag Along Rights provide a critical check against the potential abuse of power by majority shareholders, ensuring that all shareholders benefit proportionately during major sales or mergers. These rights preserve the integrity of financial returns for all investors and prevent situations where minority shareholders must accept less favorable conditions or prices. They promote a culture of fairness and respect for the rights of all investors, contributing to a transparent and trustworthy corporate environment.
Why Tag Along Rights are Relevant to a Growing Startup Company
For startups, particularly those in high-tech and rapidly evolving markets, implementing a Tag Along Right is almost a must have for Venture Capitals and Angel Investors as it allows them to exit with founders and majority of the investors when they decide to. This is crucial for maintaining investor confidence and stability, which are vital for attracting further investments and supporting the company’s growth trajectory.
Example
Imagine a startup with two main shareholders: A, who owns 70% of the company, and B, who owns 30%. If A decides to sell their 70% stake to a new investor, B, with tag-along rights, can choose to sell his/her 30% stake under the same terms. This ensures B receives the same deal as A and avoids being left at a disadvantage.
Things to Consider
- Threshold Percentage: Consider setting a minimum percentage of shares to include in a sale to activate the tag-along rights. This approach allows majority shareholders to sell small amounts of shares without triggering the tag-along provision.