When investors purchase equity in a corporation or limited liability company the primary purpose of the transaction is to obtain an ownership interest in the corporation or LLC, with the hope if not the expectation that the equity will increase in value and ultimately be sold at a profit. Further, there may be periodic distributions of profits in respect of the equity. However investors also will typically negotiate for various rights when purchasing equity in a company, such as the right to information regarding the company or to attend board meetings. Among the more important rights to seek are “tag-along” rights, which provide that if one of the founders sells stock in the company to a third party, the investor can participate in the sale. For instance, if a founder were to sell 50% of her stock in the company, the investor would have the right to include up to 50% of the investor’s stock in the sale upon the same terms (and for each share of stock the investor includes in the sale, there would be a corresponding reduction in the amount of stock the founder would include, unless the buyer were willing to increase the number of shares being purchased).
The tag-along rights are important, as without them an investor in a company may have little opportunity to sell his or her stock in the company unless it were to go public or be sold as a whole.
If you wish to learn more about tag-along or other investors rights please contact Stephen Goldstein at Sgoldstein@sgoldlaw.com , or at (212) 586-5555.