Co-Sale Rights
Investor right to sell shares alongside a founder in a secondary transaction on the same terms.
Co-sale rights (also called tag-along rights) allow preferred investors to participate in the sale of founder or major stockholder shares to a third party, selling their own shares on the same terms and at the same price as the selling stockholder. Co-sale rights protect investors from being 'left behind' when founders sell significant stakes—ensuring investors can access the same liquidity opportunity on the same economic terms.
Co-sale rights operate after the right of first refusal process. If ROFR holders do not exercise (or partially exercise), investors with co-sale rights can 'tag along' on the remaining shares in the transaction. For example, if a founder is selling 1,000,000 shares and investors have pro-rata co-sale rights, investors can reduce the number of founder shares sold and substitute their own shares up to their proportionate share of the transaction.
Co-sale provisions specify which stockholders hold co-sale rights (typically preferred investors, sometimes later-round investors only), the calculation of each investor's pro-rata entitlement, the notice and exercise period (typically 30 days), and the treatment of oversubscription (if investors elect to co-sell more than their pro-rata, shares are allocated pro-rata among interested co-sellers).
From the founder's perspective, co-sale rights reduce the number of shares they can sell in any secondary transaction and complicate the logistics of managing multiple sellers. From the investor's perspective, co-sale rights provide essential parity: if a founder has found a buyer willing to pay a premium price, investors deserve the same access.
Co-sale rights typically terminate upon a company IPO (when all shareholders gain equal market access) or a registered change of control.
FAQs
What is the difference between co-sale rights and drag-along rights?
Co-sale (tag-along) rights protect minority investors by allowing them to participate in a sale initiated by a major stockholder—they can choose to join the sale if they wish. Drag-along rights protect majority stockholders (often investors) by compelling minority stockholders (often founders) to sell their shares in an approved transaction even if they prefer not to. Tag-along gives minority holders a voluntary right to participate; drag-along imposes an obligation on minority holders to accept a sale approved by a specified majority. Both provisions appear in the same stockholder agreements but serve opposite functions.
How is co-sale entitlement calculated in practice?
Co-sale entitlement is typically calculated pro-rata based on each investor's percentage ownership of the company on a fully diluted basis. If an investor holds 10% of the company and a founder proposes to sell 500,000 shares, the investor's co-sale entitlement is 10% × 500,000 = 50,000 shares. The founder would then only be able to sell 450,000 shares, with the investor selling 50,000 shares to the same buyer on the same terms. If multiple investors have co-sale rights, each participates pro-rata to their ownership relative to all co-sale rights holders.
Can founders structure transactions to avoid triggering co-sale rights?
Founders can avoid triggering co-sale rights through permitted transfers (gifts to family trusts, transfers to personal holding companies) that are carved out of co-sale and ROFR provisions. However, transfer restrictions typically prohibit any transfer designed to circumvent co-sale obligations, and courts may look through transactions structured specifically to avoid them. In legitimate secondary transactions—tender offers, direct sales to financial buyers—co-sale rights are generally unavoidable and should be negotiated proactively with investors. Companies increasingly facilitate structured secondary programs that acknowledge co-sale rights and manage investor participation systematically.
Related Terms
Right of First Refusal
Investor right to purchase shares before a stockholder transfers them to a third party.
Information Rights
Investor contractual rights to receive regular financial statements and company information.
Redemption Rights
Preferred stockholder right to require the company to repurchase shares after a specified period.
