A Tag-Along Agreement is a contractual agreement between management stockholders and investors usually in connection with venture capital financing where the management stockholders agree not to sell any of their stock in the company without first giving the investors the right to participate in the sale. If a majority shareholder sells under a tag-along agreement, the minority shareholder then has the right to join and sell as well. Tag-along agreements require the majority shareholder to include the minority holders as a factor in the negotiations.
Tag-along rights are rights that a minority shareholder negotiates in advance at the time of purchase, allowing a minority shareholder to sell if a majority shareholder is negotiating a sale. Tag-along rights are common in startup companies that have a lot of room to grow.
Tag-along rights help minority shareholders capitalize on deals that only a larger shareholder can pull off. Large shareholders, like venture capital firms, are more connected with potential buyers and can better negotiate payment terms than a little minority shareholder can. Tag along-rights provide minority shareholders with greater liquidity since private equity shares are incredibly hard to sell.
The concept differs greatly from the similar-sounding drag-along rights. Drag along rights are more in the majority shareholders’ favor whereas tag-along rights are generally seen as helping out the minority shareholders’ interest. Drag-along rights mean the majority shareholders have to essentially force minority shareholders to participate in the company’s sale, but it also gives minority shareholders the same price, terms, and conditions as any other seller.
Remember when your little sister used to tag along with you everywhere? This is kind of the same thing, only with tag-along rights, I’m joining in your sale of stock.