Drag-Along Rights: When Investors Can Force a Sale

Imagine this: You've built your company to $50M in revenue. You're thinking IPO. Then your Series B investor says, "We're selling to BigCorp for $100M," and you have no choice but to go along.

That's drag-along rights in action. Here's what you need to understand.

What Are Drag-Along Rights?

Drag-along rights allow a majority of shareholders (usually investors) to force all shareholders (including founders and employees) to sell their shares in an acquisition.

Without drag-along rights, a minority shareholder could block a sale by refusing to tender their shares. Most acquirers want 100% of the company, so even one holdout can kill a deal.

That's why drag-along exists: to prevent minority shareholders from blocking transactions that the majority wants.

Why Investors Want Drag-Along

From an investor's perspective, drag-along rights are essential:

• Liquidity: VCs have fund timelines. They need the ability to exit.
• Deal certainty: Acquirers won't do deals if they can't guarantee 100% ownership.
• Fiduciary duty: If a deal is good for shareholders, it should happen.

Drag-along rights are standard in virtually every venture deal. The question isn't whether to accept them—it's how to structure them fairly.

What Triggers a Drag-Along

Typical drag-along triggers:

• Threshold vote: Usually requires approval from a majority of preferred stock, a majority of common stock, or both
• Board approval: Sometimes requires board consent in addition to shareholder vote
• Specific transaction types: Usually applies to mergers, acquisitions, or asset sales over a certain threshold

The specific thresholds matter enormously. A drag-along that can be triggered by 50% of preferred stock is much more dangerous than one requiring 66% of all shareholders.

Founder Protections to Negotiate

1. Higher Approval Thresholds

Push for a higher threshold to trigger drag-along:

• Weak: Majority of preferred stock
• Better: Majority of preferred AND majority of common
• Best: Supermajority (66-75%) of all shareholders

2. Minimum Price Floor

Negotiate that drag-along can only be exercised if the acquisition price exceeds a certain threshold—typically a multiple of the original investment or a minimum total valuation.

Example: "Drag-along rights may only be exercised if the transaction values the company at 2x the total invested capital."

3. Identical Terms

Ensure that if you're dragged, you receive the same per-share consideration as the investors. No side deals where investors get cash and you get acquirer stock.

4. Representation and Warranty Limits

In acquisitions, sellers often make representations about the company. Make sure you're not personally liable for these beyond what's reasonable.

5. Time Limits

Some founders negotiate that drag-along rights expire after a certain number of years, or require re-approval after each new financing round.

The Liquidation Preference Connection

Drag-along rights become especially dangerous when combined with liquidation preferences. Consider this scenario:

• Company raised $20M with 1x liquidation preference
• Investors can trigger drag-along with majority vote
• Company gets acquired for $25M

Result: Investors take $20M, founders and employees split $5M. Investors had strong incentive to do this deal; founders did not. But drag-along meant founders couldn't say no.

This is why the minimum price floor protection is so important.

What's Reasonable

Here's what a balanced drag-along provision looks like:

• Requires approval from majority of preferred AND majority of common
• Minimum price floor of 2-3x invested capital, or a specific dollar amount
• All shareholders receive the same per-share consideration
• Limited indemnification obligations for dragged shareholders
• 60-90 day notice before closing

The Bottom Line

Drag-along rights are standard and serve a legitimate purpose. But the details matter:

• Approval thresholds determine who can trigger a drag-along
• Price floors protect you from being forced into bad deals
• Equal treatment ensures you get the same deal as investors
• Limited liability protects you from excessive risk

Don't try to eliminate drag-along—just make sure it's structured fairly.