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What are Tag-Along Rights?

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The Daily Ledger · Markets

The founder's stake went to the buyout firm last month, and the early backers used their tag-along rights to sell alongside him.

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Overview

Tag-along rights let a shareholder join a sale that another shareholder has already negotiated, selling to the same buyer at the same price. They exist because a co-owner who sells out leaves everyone else holding shares in a business now part-owned by a stranger, with no buyer of their own. Everyone who joins sells the same proportion of their own holding. Because the buyer takes no more shares than before, that proportion is smaller than the seller first proposed: a buyer set on 30% of a company still takes 30%, however many owners are now selling it. Drag-along rights force a shareholder into a sale. Tag-along rights let one in.
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Overview

Tag-along rights are the clause that stops you being left behind. Somebody else finds the buyer and agrees the price, and you get to sell into the same deal on the same terms. Worth knowing who usually holds it. In standard venture paperwork it is the investors, and the person selling is a founder taking money off the table early. You get a window of 15 to 30 days to say yes, and then the deal closes with or without you. It only fires when somebody else sells, though. Nobody selling, no right, and you stay exactly where you are. 😎

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Detail

Tag-along rights, also called co-sale rights, let a shareholder join a sale that somebody else has arranged. The problem they solve is specific. A co-owner finds a buyer for their stake and sells it. Everyone left behind holds the same shares in a business now part-owned by a stranger they did not choose, with no buyer of their own and no share of the price the seller got. A tag-along right lets them sell into that deal instead, to the same buyer, at the same price, in proportion to what the seller is selling. The buyer's appetite does not grow to accommodate the extra sellers. A buyer who agreed to take 30% of a company takes 30%, so the seller and everyone tagging divide that 30% between them in the ratio they already hold. Each of them ends up selling the same proportion of their own shares, and every one of those proportions is smaller than the seller had in mind. That is why the clause is negotiated hard: the cost of it falls on the seller, not the buyer. Where a right of first refusal also applies, the two run in sequence: the company and its investors get their chance to buy the shares first, and the tag-along covers whatever the seller can still sell afterwards. The seller has to give notice, and holders have a set window, commonly 15 to 30 days, in which to decide. Miss it and the sale closes without them.
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Detail

A tag-along right is permission to gatecrash another owner's exit. They line up the buyer, they agree the price, and you sell into the same deal on the same terms. In standard venture paperwork the ones holding this right are the investors, and the person selling is a founder taking money off the table while the business is still private. It reads as protection for the little guy. It doubles nicely as a leash on the founder. The arithmetic is proportionate. A founder owns 60% of the company and wants to sell half of that; you own 40%. The buyer has agreed to take 30% of the company and will not go above it, so the two of you carve up that 30% in line with what each of you owns: he sells 18%, you sell 12%. Both of you have sold 30% of what you held. He meant to sell half of his and sold less than a third, which is exactly why this clause gets argued over. Investors usually get a shot at buying those shares themselves before any of this starts. Only what they turn down is up for grabs, and your co-sale bites on that remainder. It does not fire on everything, either. Transfers to family trusts and to the seller's own affiliates are normally carved out. And it does nothing whatsoever until somebody else decides to sell. 😎

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Analogy

Two people own a launderette between them, half each, and both put in $60,000 years ago. One of them finds a buyer willing to pay $90,000 for half the business. Without a tag-along right that sale simply happens, and the other owner is left running the place beside a stranger, holding a half nobody has offered to buy. With one, the second owner can sell into the same deal at the same price. The buyer still wants half the business and no more, so the two of them go in together: each sells a quarter of the launderette and each takes $45,000. The one who found the buyer meant to sell everything and sold half as much. The comparison stops at the freedom to sell. A half of a launderette can go to whoever will pay for it. Shares in a private company often cannot move at all without the company's permission, so a tag-along right sits on top of a restriction rather than an open market.
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Analogy

A recording studio has two owners. One built it and runs it, holding 70% of the place; the other stumped up the cash for the remaining 30% and has never touched a mixing desk. The builder gets an offer for 30% of the studio and wants to take it. Absent a co-sale clause the deal goes through on its own, and the backer wakes up co-owning the studio with somebody he has never met, while the man who knows the trade has quietly banked a payday. Give him that clause and he climbs into the same deal on identical terms. The buyer will take 30% of the studio and not a scrap more, so the pair divide it in the ratio they already hold: the builder sells 21%, the backer sells 9%. Each has sold 30% of what he owned. Where it ends: this studio has two owners and one clause between them. A real company can have forty names on its register, and the clause tends to be written for one class of stock only, so a few of them can tag and the rest just watch. 😎
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AI explanations may contain errors · Not professional advice

Formal definition — The same term, explained the usual way

Tag-along rights, also termed co-sale rights, are contractual provisions in a shareholders' agreement or comparable instrument entitling a shareholder to participate in a proposed transfer of shares by another shareholder to a third party, by selling a proportionate number of its own shares to that transferee at the same price and on the same terms. The right is exercisable on notice from the transferring holder and within a period specified in the agreement, and is customarily subject to exemptions for transfers made for estate-planning purposes or to affiliates of the transferring holder.

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