tag along rights also known as co sale rights act as a protective shield for minority shareholders they allow these smaller stakeholders to join or tag along when a majority shareholder sells their stake ensuring they can exit on the same terms on the flip side drag along rights empower majority shareholders to force or drag minority shareholders into a sale potentially against their wishes 
understanding tag along rightstag along rights are prenegotiated rights that a minority shareholder has in a company s stock these rights allow a minority shareholder to sell their share if a majority shareholder is negotiating a sale for their stake tag along rights are prevalent in startup companies and other private firms and have upside potential tag along rights give minority shareholders the ability to capitalize on a deal that a larger shareholder often a financial institution with substantial pull puts together large shareholders such as venture capital firms are usually more able to find buyers and negotiate payment terms tag along rights therefore offer minority shareholders greater liquidity private equity shares are hard to sell but majority shareholders can often ease purchases and sales on the secondary market 1under most states laws for corporations majority shareholders owe a fiduciary duty to minority shareholders meaning they must deal with minority shareholders honestly and in good faith advantages and disadvantages of tag along rightsone of the most basic advantages of using tag along rights is that it gives the business minority shareholders including sometimes employees given stock ownership financial and legal protection when the company is being sold when a sale is proposed minority shareholders typically don t possess enough bargaining power to properly negotiate for a better deal tag along rights benefit minority shareholders because they re able to receive the same benefits the majority shareholders bargain for 2the flip side of this coin is that tag along rights could discourage majority shareholders from investing in the company after all tag along rights force the company s management and large shareholders to make concessions that will only benefit the minority shareholders in other words some investors will simply not select a company that makes less than favorable obligations of them example of tag along rightsco founders angel investors and venture capital firms often rely on tag along rights for example suppose three co founders launch a tech company the business is going well and the co founders believe they have proved the concept enough to scale the co founders then seek outside investment in a seed round a private equity angel investor sees the company s value and offers to buy 60 of it requiring a large amount of equity to compensate for the risk of investing in the small company the co founders accept the investment making the angel investor the largest shareholder the investor is tech focused and has significant relationships with some of the larger public technology companies the startup co founders know this so they negotiate tag along rights in their investment agreement the business grows consistently over the next three years and the angel investor happy with the investment returns looks for a buyer of their equity among the major tech companies the investor finds a buyer who wants to buy the entire 60 stake for 30 a share the tag along rights negotiated by the three co founders give them the ability to include their equity shares in the sale the minority investors are entitled to the same price and terms as the majority investor thus using their rights the three co founders effectively sell their shares for 30 each tag along rights vs drag along rightstag along or co sale rights are the opposite of drag along rights the major difference is that the former enables and protects minority shareholders while the latter enables and protects majority shareholders tag along rights allow minority shareholders to participate in a sale initiated by the majority shareholder permitting them to sell their shares at the same price and terms and preventing them from being left behind or forced to sell at a lower price meanwhile drag along rights favor majority shareholders 3 when a majority shareholder decides to sell their shares they can exercise drag along rights to force the minority shareholders to also sell their shares to the same buyer this is a way to ensure the majority shareholder can deliver 100 of the company s shares to a buyer purpose protect minority shareholderseffect minority shareholders can sell at same price and termstrigger majority shareholder decides to sellimpact ensures minority shareholders can participate in sale and receive a fair pricenegotiation points sale of all or part shares notice and timing execution and enforcementpurpose enable majority shareholder to force minority shareholders to selleffect minority shareholders are forced to sell at same price and termstrigger majority shareholder decides to sell and critical mass of shareholders wish to sellimpact ensures majority shareholder can deliver 100 of share capital to buyernegotiation points threshold percentage preemption rights consideration notice periodsthe terms when negotiating tag along rights and drag along rights are quite different when negotiating tag along rights there are a few key considerations these are the negotiating points for these rights 