Drag-Along Rights
The right for majority shareholders to force all shareholders to sell in an acquisition.
Definition
Drag-along rights allow a specified majority of shareholders (typically a majority of preferred holders plus a majority of common holders) to force all other shareholders to participate in a sale of the company on the same terms. This prevents minority shareholders from blocking an acquisition. Drag-along provisions are standard in venture-backed companies.
Why it matters
If a majority approves a sale, you must sell your shares at the same price and terms, even if you disagree. This means you cannot hold out for a better deal. However, drag-along provisions also ensure you get to participate in any sale on equal terms.
Example
Investors holding 60% of preferred and founders holding 55% of common approve a $200M acquisition. A minority investor who thinks the company is worth $300M is forced to sell at the $200M price due to drag-along rights.