Drag-Along Rights

Drag-along rights allow a majority of shareholders (typically a combination of common and preferred) to compel all other shareholders to vote in favor of a transaction — usually an acquisition — on the same terms. This prevents a small group of minority shareholders from blocking a deal that the majority wants to accept. Without drag-along rights, even a single holdout minority shareholder could theoretically block an acquisition, giving them enormous leverage. Drag-along rights are standard in VC deals and protect both investors and founders from being held hostage by minority shareholders (often early employees or small angels) who may have different financial motivations.