Why does Tag-Along Rights (Co-Sale Rights) matter?
It protects minority holders, often founders relative to a controlling investor or early investors relative to a founder's personal secondary sale, from a scenario where a majority holder sells their stake to a new controlling party on favorable terms while the minority is stuck holding illiquid shares with no influence left over the company. The right to tag along converts that risk into an option to exit alongside the majority holder on the same terms.
What does Tag-Along Rights (Co-Sale Rights) look like in practice?
Suppose a founder who has retained a controlling stake decides to sell half their position to a private buyer at an attractive price. If the seed investors hold tag-along rights, they can require that a proportional share of their own stock be included in that same sale at the same price, rather than being left as minority holders under whatever ownership structure results from the founder's partial exit.
What are the common mistakes with Tag-Along Rights (Co-Sale Rights)?
- Not checking whether tag-along rights apply only to a full company sale or also to a founder's or major holder's partial secondary sale.
- Treating tag-along and drag-along rights as the same mechanism, when one protects minority holders' ability to join a sale and the other compels them to.
- Overlooking the notice period required to exercise tag-along rights, which can be too short to realistically decide within.
- Assuming tag-along rights guarantee the same per-share price in every structure, when some agreements only guarantee the same general terms, not an identical price.
Related concepts
- Drag-Along RightsA provision letting shareholders holding a specified majority force all other shareholders to participate in, and not block, a sale of the company on the same terms, so a small minority cannot hold up an acquisition the majority wants to accept.
- Secondary SaleThe sale of already-issued shares from an existing shareholder (a founder, early employee, or early investor) to a new or existing investor, with the proceeds going to that shareholder rather than to the company as new capital.
- Cap TableThe authoritative record of who owns what in a company, every founder, investor, and option holder, with share counts, security type, and percentage ownership.