Definition
Drag-Along Rights
Drag-along rights let majority shareholders force minority holders to join in the sale of the company on the same terms.
If a buyer wants to acquire 100% of a startup, drag-along rights allow the controlling shareholders (often founders plus major investors above a threshold) to compel the minority to sell their shares too, on identical terms. This prevents a small holdout from blocking a clean exit.
Drag-along clauses are standard in shareholders' agreements and are paired with tag-along rights that protect minorities. The threshold and conditions for triggering a drag are negotiated, as they affect founders' and investors' control over an exit.
Related terms
- Term SheetA term sheet is the non-binding document that sets out the key terms of a proposed startup investment before definitive agreements are drafted.
- Exit (Startup/PE)An exit is the event through which investors realise the value of their stake — typically an IPO, acquisition or secondary sale.
- Tag-Along RightsTag-along rights let minority shareholders join a sale on the same terms when a majority shareholder sells their stake.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.