A drag-along right lets the stockholders who approve a sale of the company require every other stockholder to vote for it and sell on the same terms. It keeps a few holdouts from blocking an exit that the board and most of the cap table want. Who can pull the trigger, and what protections the dragged stockholders get, are what founders should focus on.
Key takeaways
- Drag-alongs are common in priced rounds, and usual from the Series A on. The negotiation is over who can trigger one, not whether it exists.
- The market-standard trigger requires more than investors alone: usually the board, a majority of the preferred, and often a majority of the common.
- Dragged stockholders should get the same price per share within their class, limited representations, and liability capped at what they receive.
- A drag-along can help founders too, by keeping small holders from blocking a sale.
Why do drag-along rights exist?
Buyers want 100% of a company. Without a drag-along, a single small stockholder (an early angel, a departed co-founder, a former employee with a few shares) can hold up a sale or demand special terms. The drag-along requires them to vote for the deal and sign on the same terms as everyone else in their class. That protects the investors who negotiated it, and it protects founders who want to sell.
Buyers rarely close with only a bare majority on board. They usually want nearly every stockholder to approve the deal and give up any claims against it. The drag-along is how the company collects those signatures.
Who can trigger the drag-along?
The standard financing documents (NVCA-based) let the parties choose the trigger. Common versions, from most to least investor-friendly:
- A majority of the preferred alone. Risky for founders, since one lead investor may hold most of the preferred.
- The board plus a majority of the preferred.
- The board, a majority of the preferred and a majority of the common. Often the common vote is limited to common held by founders or current employees. This is the version founders should ask for.
An example. A Series A lead buys 60% of the Series A preferred, and the Series A is 30% of the company. The lead owns 18% of the company. If the drag needs only a majority of the preferred, that one investor can force a sale on its own. If it also needs the board and a majority of the common, the founders have to agree too.
In practice, companies rarely have to go to court over a drag-along. Its main job is to give a holdout a reason to sign.
What protections do dragged stockholders get?
A well-drafted drag-along conditions the forced sale on terms like these:
- Same price and form of payment for every share in the same class (with the preferred paid according to its liquidation preference). See Liquidation Preference.
- Limited representations: dragged stockholders vouch only for their own ownership of their shares and their authority to sell, not for the business.
- Capped liability: any indemnity is several (not joint), pro rata, and capped at the proceeds each stockholder receives, except for their own fraud.
- No new restrictions: dragged stockholders can’t be required to sign a non-compete or similar covenant as a condition of the sale.
- Appraisal and release: dragged stockholders are usually asked to waive their right to have a court value their shares and to release claims. A well-drafted drag-along asks them to sign nothing broader than what the approving stockholders sign.
Are SAFE holders and small angels bound?
Usually once they become stockholders. When a SAFE converts in a priced round, the holder typically signs the voting agreement that contains the drag-along. That’s why the trigger you agree to in your first priced round matters: it will bind almost everyone on your cap table.
How is a drag-along different from a tag-along?
They work in opposite directions. A drag-along lets the approving stockholders force others to sell. A tag-along (or co-sale right) lets other stockholders join a sale of someone else’s shares, so one holder can’t sell out alone. Priced rounds usually include both: the tag-along in the ROFR and Co-Sale Agreement, and the drag-along in the voting agreement. See Right of First Refusal.
What should founders negotiate?
- The trigger: board plus preferred plus common, not the preferred alone
- The protections: same price per class, own-title reps only, liability capped at proceeds, and no forced non-competes
- Consistency: make sure later rounds don’t quietly loosen the trigger
Related: What Are Protective Provisions? · What Are the 3 Types of Startup Acquisitions? · NVCA Seed and Series A Round
