Quick facts
- What it does: compels minority holders to join a sale the majority approves
- Where it lives: the voting agreement, not the charter
- Usual trigger: approval by the board plus a defined majority of preferred
- Hidden cost: voting or consenting in favour forfeits appraisal
- Companion right: tag-along, which protects rather than compels
A drag-along right lets a defined majority of shareholders force everyone else to participate in a sale of the company on the same terms. If it is triggered, you sell whether you agree with the price or not.
It exists because buyers want 100%, and it works because you signed it years earlier, at a moment when a sale was hypothetical and the document was long.
In plain English
A buyer rarely wants 87% of a private company. They want all of it, with no minority holders left to object, sue, or hold out for more.
A drag-along solves that in advance. It converts the consent of a majority into the consent of everybody. The minority's agreement is obtained once, at signing, and spent later.
Where it lives, and why that matters
Drag-along provisions sit in the voting agreement, one of the standard documents in a priced venture round. The National Venture Capital Association publishes the model set that the industry uses, which includes a Voting Agreement and a Right of First Refusal and Co-Sale Agreement alongside the charter and purchase agreement.1
This location matters for a practical reason. Founders read the certificate of incorporation and the stock purchase agreement, because those documents carry the price. The voting agreement looks procedural. It is where control of your exit actually sits.
How it is triggered
A typical drag requires some combination of:
- board approval,
- approval by holders of a specified majority of the preferred stock, and
- sometimes approval by a majority of the common stock or of the founders.
Everything turns on that list. A drag triggered by preferred alone hands the exit decision to your investors. A drag that also requires common approval, or a founder-specific consent, leaves you a say.
Read your own trigger before assuming which one you have.
What you are actually agreeing to do
The obligation is usually broader than "sell your shares." A well-drafted drag requires the dragged holder to:
- vote all shares in favour of the transaction,
- execute the transaction documents,
- give the same representations and indemnities as everyone else, and
- refrain from exercising appraisal or dissenters' rights.
That last item is the one to notice.
The appraisal trap
Appraisal is the statutory right to ask the Court of Chancery to determine the fair value of your shares instead of accepting the deal price. It is the minority's main protection against being underpaid.
Delaware conditions it precisely. Appraisal is available to a stockholder who "has neither voted in favor of the merger... nor consented thereto in writing pursuant to § 228 of this title."2
Now put that next to a drag-along that obliges you to vote in favour. Complying with your contract destroys your statutory remedy. Refusing to comply breaches the contract. The provision is built so that the choice is not really available.
Section 228 is what makes this fast: stockholder action may be taken "without a meeting, without prior notice and without a vote" if holders with the necessary votes sign a written consent.3 A deal can therefore be approved by signature, with the dragged holders' consent supplied under an obligation they accepted years before.
Drag-along and tag-along
They are frequently confused and point in opposite directions.
- Drag-along compels you to sell when the majority sells. It protects the buyer and the majority.
- Tag-along, or co-sale, entitles you to sell on the same terms if the majority sells. It protects the minority.
A founder wants a narrow drag and a broad tag. Investors generally want the reverse.
What to negotiate
A price floor. A drag that cannot be triggered below a stated valuation, or below a multiple of the preference, prevents you being forced into a sale that pays common stock nothing.
Common consent in the trigger. Requiring a majority of common, not only preferred, keeps founders and employees in the decision.
Capped liability. Your indemnity obligations should be limited to your share of the proceeds, and ideally to the escrow. Otherwise a sale you did not want can cost you more than it paid you.
Same form of consideration. You should receive what everyone else receives. Without this, you can be dragged into a deal where investors take cash and common takes stock in a private acquirer.
What this means for a founder
Combine three things covered elsewhere on this site and the outcome writes itself. A large liquidation preference sits ahead of common. A drag-along lets preferred holders approve a sale. A squeeze-out merger converts the remaining shares to cash.
At a sale price below the preference stack, that sequence produces a completed transaction in which the founders vote in favour of receiving very little, because they agreed to vote in favour before knowing the price.
Find your voting agreement. Identify who can trigger the drag, whether any minimum price applies, and whether you are among the parties whose consent is required. If you cannot answer those three questions, you do not currently control whether or when your company is sold.
Related reading
- Appraisal Rights covers the remedy a drag-along usually waives
- Squeeze-Out Merger covers the mechanism that finishes the job
- Liquidation Preference covers who is paid before common
- Cap Table covers where the holders bound by the agreement are recorded