VC Cheat Sheet: Drag-Along and Tag-Along Rights Explained

When it comes to venture capital (VC) deals, there are several key terms that entrepreneurs and investors need to understand. Two of the most important are drag-along rights and tag-along rights. In this article, we'll explore what these rights are, how they work, and why they're crucial in VC deals.

Drag-along rights give the majority shareholder the ability to force the sale of the minority shareholder's shares to a third party. This is often used in situations where the majority shareholder wants to sell the company and needs the minority shareholder's shares to complete the sale. Drag-along rights ensure that the minority shareholder's shares are included in the sale, even if they don't want to sell.

Tag-along rights, on the other hand, give the minority shareholder the right to sell their shares at the same price and on the same terms as the majority shareholder. This is often used in situations where the majority shareholder is selling their shares to a third party and the minority shareholder wants to sell their shares as well. Tag-along rights ensure that the minority shareholder gets a fair price for their shares.

In this article, we'll explore the benefits and drawbacks of drag-along and tag-along rights, as well as how they can be used in VC deals. We'll also provide a cheat sheet for entrepreneurs and investors to use when negotiating VC deals.

Drag-along rights and tag-along rights are crucial in VC deals because they help to ensure that all shareholders are treated fairly and that the sale of the company is completed smoothly. By understanding these rights, entrepreneurs and investors can make informed decisions and negotiate better deals.

So, what are drag-along and tag-along rights? How do they work? And why are they important in VC deals? Read on to find out.