Tag-Along Rights

What Are Tag-Along Rights?

Tag-along rights (also known as co-sale rights) are contractual provisions that protect minority shareholders by allowing them to participate in a sale when a majority shareholder or founder sells their shares to a third party. If a major shareholder negotiates a sale of their shares, tag-along rights give other shareholders the right to "tag along" and sell their shares in the same transaction, at the same price and on the same terms.

Tag-along rights exist to prevent a scenario where controlling shareholders sell their position to a buyer (potentially at a premium) while leaving minority shareholders stuck in an illiquid company with a new, potentially unfriendly majority owner.

How Tag-Along Rights Work

The Trigger

Tag-along rights are triggered when a shareholder covered by the provision (typically a founder or major investor) proposes to sell their shares to a third-party buyer. The selling shareholder must notify the other shareholders of the proposed transaction, including the price, number of shares, and buyer identity.

The Right to Participate

Shareholders with tag-along rights can elect to participate in the sale. Typically, each tag-along shareholder can sell a proportional amount of their shares — if the buyer is purchasing 50% of the seller's shares, each tag-along shareholder can sell up to 50% of their own shares in the same transaction.

The Buyer's Obligation

The buyer must purchase shares from the tag-along shareholders on the same terms as from the original seller. If the buyer is unwilling to purchase additional shares from tag-along participants, the original seller may be prohibited from completing the sale.

Tag-Along vs. Drag-Along

Tag-along and drag-along rights are complementary but opposite:

• Tag-along: Minority shareholders have the right (but not the obligation) to sell alongside the majority
• Drag-along: Majority shareholders can force minority shareholders to sell in a transaction

Both provisions are typically found in shareholders' agreements and investors' rights agreements.

Practical Implications for Startup Employees

Protection for Employee Shareholders

If you have exercised your stock options and own shares in a private company, tag-along rights protect you from being left behind when founders or investors sell their positions. Without tag-along rights, a founder could sell their shares to a buyer at an attractive price, and you would have no ability to participate — leaving you holding illiquid shares in a company now controlled by a new party.

Check Your Shareholders' Agreement

Tag-along rights are not automatic — they must be included in the company's shareholders' agreement, investors' rights agreement, or stock purchase agreement. When you exercise your options and sign a stock purchase agreement, check whether it includes co-sale or tag-along provisions. If not, your shares may be left out of future secondary transactions.

Practical Limitations

Even with tag-along rights, the practical ability to sell depends on the buyer being willing to purchase additional shares. In many cases, secondary buyers are interested in a specific shareholder's block of shares and may not want to increase their total purchase. If the buyer declines to purchase tag-along shares, the transaction may be restructured to avoid triggering the provision.

How It Relates to Exercising Stock Options

Tag-along rights apply only to shareholders — not to option holders. Until you exercise your options and become a shareholder, you do not have tag-along rights. This is one consideration in the exercise decision: owning shares (rather than holding unexercised options) gives you access to shareholder protections including tag-along rights, information rights, and voting rights. If you believe there is a chance of secondary sales or partial exits by founders or investors, exercising your options to gain shareholder status (and the associated tag-along rights) may be advantageous.