Tag-Along Rights
A right allowing minority shareholders to sell their shares alongside a majority shareholder on the same terms in a proposed sale.
Tag-along rights (also called co-sale rights or piggyback rights) are protective provisions that allow minority shareholders to participate in a sale of shares by a majority shareholder, ensuring they can exit at the same price and on the same terms as the selling majority holder. They prevent controlling shareholders from selling their shares at a premium to a third party while minority shareholders remain locked in.
For example, if a founder with 40% ownership is selling to an acquirer, investors with tag-along rights can require that the acquirer also purchase their shares at the same per-share price. The acquirer must either agree to buy all tagged-along shares or reduce the founder's allocation proportionally to accommodate the tag-along participants.
Tag-along rights are typically held by investors (especially smaller, minority investors) to protect against scenarios where founders or majority investors privately negotiate exits that leave minority holders behind. They are a standard feature in investor rights agreements and stockholder agreements.
The practical effect of tag-along rights on M&A transactions depends on the acquirer's goals. If the acquirer wants only key founder involvement (perhaps as an earn-out), they may structure transactions to avoid triggering tag-along rights. If they want 100% acquisition, tag-along is less of an issue since they're buying everyone's shares anyway.
Tag-along rights should be distinguished from registration rights in public company contexts, where the concept of piggyback registration rights allows investors to include their shares in company-initiated public offerings — a related but distinct concept.
FAQs
Do tag-along rights apply in a priced funding round?
Typically no — tag-along rights usually apply to secondary sales by founders or major shareholders to third parties, not to new share issuances in financing rounds. The mechanism for maintaining ownership in financing rounds is pro-rata (preemptive) rights. Tag-along specifically addresses transfers of existing shares.
What percentage triggers tag-along rights?
Tag-along provisions typically specify a minimum threshold of shares being sold that triggers the right — commonly when a shareholder is selling more than a specified percentage of their holdings (e.g., 5–10%). Small transfers (gifts, estate planning, transfers to affiliated funds) are usually carved out from triggering co-sale rights.
Can tag-along rights be waived?
Yes, tag-along rights can be waived by the rights holders (investors) in specific transactions, typically through a written consent or a provision in the investor rights agreement specifying waiver mechanisms. Major transactions often require the company to negotiate tag-along waivers as part of deal logistics, especially when the acquirer has constraints on total acquisition size.
Related Terms
Drag-Along Rights
A provision allowing majority shareholders to force minority shareholders to agree to a company sale on the same terms.
Pro-Rata Rights
The right of existing investors to participate in future funding rounds proportionally to maintain their current ownership percentage.
Cap Table
A spreadsheet or software record showing all equity ownership in a company, including shares, options, warrants, and convertible instruments.
Liquidation Preference
A provision giving preferred stockholders the right to receive their investment back before common shareholders in a company sale or liquidation.
