Drag Rights

Drag rights (drag-along rights) give holders — typically a majority of investors or a combination of investors and founders — the power to require all other shareholders to vote in favor of and participate in a company sale or merger on the same terms. Without drag rights, a holdout minority shareholder (even with a tiny ownership percentage) could block an acquisition that the majority wants to accept. Drag rights are a standard and non-controversial provision in VC term sheets. The threshold for triggering drag rights varies: some agreements require a simple majority of preferred, others require supermajority votes of combined common and preferred. Founders should understand their drag exposure — in some structures, investors can drag founders into a sale against their wishes.