Deal Terms
Drag-Along Threshold
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.
Related Concepts
Further Reading
How to Negotiate a Term Sheet as a First-Time Founder
Your first term sheet is exciting and terrifying. Know what's negotiable, what's standard, and the practical tactics for pushing back on liquidation preferences, board seats, and protective provisions.
How to Negotiate Your Term Sheet: A Founder's Playbook
A tactical guide to negotiating your startup term sheet — which terms matter most, where to push back, and how to protect your interests without killing the deal.
How to Read a Term Sheet: A Practical Breakdown
Term sheets aren't designed to be readable. Here's a section-by-section guide to what matters, what's standard, and what should make you walk away.
Term Sheet Explained: Every Clause Founders Must Know
Term sheets are dense, jargon-heavy, and consequential. Here's a founder-friendly breakdown of every major clause and what it means for your company.
Newsletter
The VC Beast Brief
Join thousands of founders and investors. Every Tuesday.
VentureKit
Ready to launch your fund?