Drag-Along Rights

When investors purchase equity in a corporation or limited liability company they often ask for 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. Conversely, as a condition to the sale of the stock to the investor the company and the founders may insist that they be granted drag-along rights. Per a typical drag-along rights provision, if the founders elect to sell at least a majority of the outstanding stock in the company, all other shareholders must sell the same percentage of their stock as is being sold by the founders. Thus, if the founders sell 75% of their stock to a third party, all investors must sell 75% of their company stock on the same terms, regardless of the purchase price paid. Since this can result in an investor having to sell her stock for less than she paid, the investor will often seek to require that the price must exceed some agreed to threshold before the drag-along rights can be invoked.

If you wish to learn more about drag-along rights please contact Stephen Goldstein at Sgoldstein@sgoldlaw.com, or at (212) 586-5555.