Legal & Compliance
Last updated
Quick Answer
A clause that allows majority shareholders to force minority shareholders to join in a sale of the company on the same terms.
A drag-along provision gives controlling shareholders (typically founders and major investors holding a specified supermajority) the right to compel all other shareholders to participate in a sale transaction. This prevents minority shareholders from blocking or holding up an acquisition that the majority has approved. The provision typically requires that minority shareholders receive the same price and terms as the majority.
In Practice
When the acquisition offer came in at $500M, the drag-along provision allowed the board and 75% of shareholders to compel the remaining 25% to sell, preventing any holdouts from blocking the deal.
Why It Matters
Drag-along provisions are essential for clean exits. Without them, a small minority shareholder could block a beneficial acquisition, holding the entire company hostage.
VC Beast Take
Drag-along rights are the corporate equivalent of 'we're all going to the restaurant the group picked.' Necessary for functioning governance.
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A drag-along provision gives controlling shareholders (typically founders and major investors holding a specified supermajority) the right to compel all other shareholders to participate in a sale transaction.
Understanding Drag-Along Provision is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Drag-Along Provision falls under the legal category in venture capital. This area covers concepts related to the legal frameworks and compliance requirements in venture capital.
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