Tag-Along Rights

What Are Tag-Along Rights?

Tag-along rights likewise alluded to as "co-sale rights," are contractual obligations used to safeguard a minority shareholder, as a rule in a venture capital deal. On the off chance that a majority shareholder sells his stake, it gives the minority shareholder the right to join the transaction and sell their minority stake in the company. Tag-alongs really oblige the majority shareholder to remember the holdings of the minority holder for the exchanges with the goal that the tag-along right is worked out.

Grasping Tag-Along Rights

Tag-along rights are pre-negotiated rights that a minority shareholder remembers for their initial issuance of a company's stock. These rights permit a minority shareholder to sell their share in the event that a majority shareholder is arranging a sale for their stake. Tag-along rights are common in startup companies and other private firms with considerable upside potential.

Tag-along rights empower minority to capitalize on a deal that a larger shareholder — frequently a financial institution with considerable pull — puts together. Large shareholders, like venture capital firms, frequently have a greater ability to source buyers and arrange payment terms. Tag-along rights, subsequently, give minority shareholders greater liquidity. Private equity shares are unquestionably difficult to sell, yet majority shareholders can frequently work with purchases and sales on the secondary market.

Under most states' laws in regards to corporations, majority shareholders owe a fiduciary duty to minority shareholders, meaning they must deal with minority shareholders sincerely and with sincere intentions.

Advantages and Disadvantages of Tag-Along Rights

One of the most essential advantages of utilizing tag-along rights is that it gives the business' minority shareholders (counting, some of the time, employees given stock ownership) financial and legal protection when the company is being sold. At the point when a sale is proposed, minority shareholders ordinarily don't have sufficient bargaining power and legal information to haggle for a better deal appropriately. Tag-along rights benefit minority shareholders since they're able to receive similar benefits the majority shareholders bargain for.

The flip side of this coin is that tag-along rights might deter majority shareholders from investing in the company. All things considered, tag-along rights force the company's management and large shareholders to make concessions that will just benefit the minority shareholders. As such, a few investors will basically not select a company that makes not exactly favorable obligations of them.

Illustration of Tag-Along Rights

Prime supporters, angel investors, and venture capital firms frequently depend on tag-along rights. For instance, we should expect that three prime supporters send off a tech company. The business is working out in a good way, and the fellow benefactors accept that they have proved the concept enough to scale. The prime supporters then look for outside investment as a seed round. A private equity angel investor sees the value of the company and offers to purchase 60% of it, requiring a large amount of equity to make up for the risk of investing in the small company. The prime supporters acknowledge the investment, making the angel investor the largest shareholder.

The investor is tech-centered and has critical associations with a portion of the larger, public technology companies. The startup fellow benefactors know this and, accordingly, arrange tag-along rights in their investment agreement. The business develops reliably over the course of the next three years, and the angel investor, content with their investment return on paper, searches for a buyer of their equity among the major tech companies.

The investor finds a buyer who needs to purchase the whole 60% stake for $30 a share. The tag-along rights negotiated by the three fellow benefactors empower them to incorporate their equity shares in the sale. The minority investors are qualified for similar price and terms as the majority investor. In this way, the three fellow benefactors, utilizing their rights, successfully sell their shares for $30 each.

Tag-Along Rights FAQs

What Is the Difference Between Tag-Along Rights and Drag-Along Rights?

Tag-along or co-sale rights are basically something contrary to drag-along rights. While tag-along rights give minority shareholders arranging rights in the event of a sale, drag-along rights force the minority shareholders to acknowledge anything deal is negotiated by majority shareholders.

Do Tag-Along Rights Make it Easier or Harder to Sell Shares in a Company?

In certain examples, tag-along rights can make the selling system more troublesome. It becomes more enthusiastically to complete the sale when the potential buyer would rather not increase or change the terms of their offer to satisfy minority shareholders.

What Is a Come-Along Clause?

A go along clause, likewise alluded to as drag-along rights, force minority shareholders to sell their shares when majority shareholders choose to sell theirs. A go along clause is basically something contrary to tag-along rights.

Features

• Tag-along rights can once in a while make it more challenging for a sale to be completed.
• Tag-along rights are contractual obligations to safeguard a minority investor in a startup or company.
• Tag-along rights are fundamentally used to guarantee that the stake of minority stakeholders is considered during a company sale.
• The minority investors are qualified for similar price and conditions as the majority investor when the shares are sold.
• Tag-along rights likewise give greater liquidity to minority shareholders.