Deal Terms
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Quick Answer
The ownership percentage required to trigger drag-along rights, forcing all shareholders to participate in a sale of the company.
The drag-along threshold is the minimum percentage of shareholder approval needed to invoke drag-along provisions, which force all remaining shareholders to sell their shares on the same terms as the approving majority. Common thresholds range from 50% to 75% of preferred stock, sometimes also requiring board approval or a minimum return threshold.
In Practice
The Series B term sheet set the drag-along threshold at 60% of preferred stock plus board approval. When a $300M acquisition offer came in, the Series A and B investors (holding 65% of preferred) triggered the drag-along, compelling the founders and angels to sell despite their objections.
Why It Matters
Drag-along thresholds determine who has the power to force a sale. Lower thresholds give investors more control, while higher thresholds protect minority shareholders. Founders should negotiate for the highest reasonable threshold and additional protections like minimum return requirements.
VC Beast Take
The worst drag-along scenarios occur when investors can force a sale that returns their liquidation preferences but leaves nothing for common shareholders. Smart founders negotiate minimum return thresholds or require common shareholder approval alongside the preferred vote.
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The drag-along threshold is the minimum percentage of shareholder approval needed to invoke drag-along provisions, which force all remaining shareholders to sell their shares on the same terms as the approving majority.
Understanding Drag-Along Threshold is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Drag-Along Threshold falls under the deal-terms category in venture capital. This area covers concepts related to the financial and legal terms that define investment agreements.
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