Drag-along and tag-along

Drag-along lets a specified majority force all shareholders to sell their shares in an approved sale on the same terms. Tag-along (co-sale) lets minority holders join when a major holder sells, selling pro rata into the same deal.

Without drag-along, a small common holder can try to hold up an acquisition. Buyers hate holdouts. Drag-along is standard and usually good for getting deals done. See M&A.

The big idea

A bus that leaves when most ticket-holders vote to go, and stragglers are put on the bus anyway, is drag-along. Tag-along is the right to climb on if the driver sells their own seat to a new owner. The analogy breaks on price: preferred's liquidation preference can mean common is dragged into a deal that pays them zero.

Negotiate the threshold (for example majority of preferred plus majority of common, or board plus a shareholder threshold) and the requirement that preferred cannot drag common into a wipeout without common consent. Counsel will have preferred language. The fairness fight is about when a drag can zero common.

Tag-along protects minorities from being left behind when founders or a large investor exit secondary. It sits next to ROFR and co-sale.

Walking through it

A buyer offers $80M. Preferences total $50M. The board and a majority of preferred want the deal. A 2% common holder refuses, hoping to extract a side payment. Drag-along at a documented threshold forces that holder to sell on the same terms. The deal closes.

Flip the economics: offer is $40M, preferences are $50M. Common gets nothing unless there is a carve-out. A drag that lets preferred force that close without a common vote is the wipeout case. That is the clause to negotiate before anyone is tired and the buyer has a deadline.

On the tag side: a founder sells 10% of the company to a secondary buyer. Investors with tag-along can sell a proportionate slice into that same purchase so they are not stuck while the founder takes cash.

Common mistakes

• Fighting drag-along as if it were anti-founder. The holdout problem is real. Fight the wipeout threshold, not the existence of drag.
• Ignoring tag-along on founder secondaries. A quiet founder sale can leave investors and employees behind.
• Leaving the threshold vague. "A sale the board likes" is not a number.

Check yourself

Why do buyers want drag-along?

So a small holder cannot block or ransom a sale that the required majority already approved.

When should common still have a say despite drag-along?

When the deal would pay common zero because preferences eat the whole price.

Key takeaways

• Drag-along forces everyone into an approved sale so holdouts cannot kill M&A.
• Negotiate thresholds and wipeout protection for common.
• Tag-along lets minorities sell alongside a major holder.

Further learning

Next, pro-rata rights — who gets to buy the next round.