What are 'Tag-Along Rights'

Tag-along rights, also referred to as "co-sale rights," are contractual obligations used to protect a minority shareholder, usually in a venture capital deal. If a majority shareholder sells his take, it gives the minority shareholder the right to join the transaction and sell his minority stake in the company. Tag-alongs effectively oblige the majority shareholder to include the holdings of the minority holder in the negotiations in order to facilitate the possibility that a tag-along right is exercised.

BREAKING DOWN 'Tag-Along Rights'

Tag-along rights are pre-negotiated rights that a minority shareholder includes in his initial issuance of a company's stock. These rights allow a minority shareholder to sell his share if a majority shareholder is negotiating a sale for his stake. Tag-along rights are prevalent in startup companies and other private firms with considerable upside potential.

Tag-along rights gives minority shareholders the ability to capitalize on a deal that a larger shareholder, often a financial institution with considerable pull, is able to put together. Large shareholders, like venture capital firms, often have greater ability to source buyers and negotiate payment terms. Tag along-rights, therefore, provide minority shareholders with greater liquidity. This is because private equity shares are incredibly hard to sell, and majority shareholders are often able to facilitate purchases and sales on the secondary market.

An Example of Tag-Along Rights

Cofounders, angel investors and venture capital firms alike often rely on tag-along rights. Let's say, for example, that three cofounders launch a new tech company. The business is going well and the cofounders believe that they've proven the concept enough to scale, and seek outside investments in the form of a seed round. A private equity angel investor sees the value of the company and offers to purchase 60% of the company, requiring a large amount of equity to compensate for the risk of investing in the small company. The cofounders accept the investment, making the angel investor the largest shareholder.

The investor is tech-focused, and he has significant relationships with some of the larger, public technology companies. The startup cofounders know this and therefore negotiate tag-along rights in their investment agreement. The business grows consistently over the next three years, and the angel investor, happy with his investment return on paper, looks for a buyer of his equity among the major tech companies.

The investor finds a buyer who wants to purchase the entire 60% stake for $30 a share. The tag-along rights negotiated by the three cofounders gives them the ability to include their equity shares in the sale. The three cofounders, using their rights, effectively sell their shares for $30 each.

RELATED TERMS
  1. Common Shareholder

    The rights of common shareholders give them the ability to influence ...
  2. Working Control

    Working control occurs when a minority shareholder (or shareholders) ...
  3. Shareholder

    A shareholder is any person, company, or institution that owns ...
  4. Uniform Transfers To Minors Act ...

    The Uniform Transfers to Minors Act (UTMA) is an act that allows ...
  5. Custodial Account

    A custodial account is a fund set up by an adult for a beneficiary ...
  6. Shareholder Value

    The value delivered to shareholders because of management's ability ...
Related Articles
  1. Investing

    How To Calculate Minority Interest

    Minority interest calculations require the use of minority shareholders’ percentage ownership of a subsidiary, after controlling interest is acquired.
  2. Retirement

    Designating a minor as an IRA beneficiary

    Leaving an IRA to minors can be a complicated procedure. Make sure you understand how your gift will be distributed, managed and taxed.
  3. Managing Wealth

    Can I Become An Angel Investor?

    Because of SEC rules, you already need significant assets to become an angel investor.
  4. Investing

    Stock Rights Issue

    Rights are offers that allow existing stockholders to buy additional shares at a predetermined price, for a set time period. Usually, the number of shares the investor can purchase are in proportion ...
  5. Investing

    What Does Negative Shareholder Equity On A Balance Sheet Mean?

    Negative shareholder equity on a company’s balance sheet is a red flag that should prompt potential investors to take a closer look before committing their money.
  6. Investing

    A Peek Into Shareholder Meetings

    Shareholder meetings can be glamorous, exciting or controversial, but not particularly revelatory.
  7. Small Business

    Whom Should Corporations Please?

    Companies balance the interests of owners, customers and employees. Find out who comes out on top.
  8. Small Business

    How To Raise Seed Capital and Grow Your Startup

    To get a business off the ground, entrepreneurs need a clear understanding of how to strategically position themselves for VC firms and angel investors.
  9. Investing

    Investing in Stock Rights and Warrants

    Learn why many companies choose to issue rights or warrants as an alternative means of generating capital and how their value is determined.
RELATED FAQS
  1. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ... Read Answer >>
  2. How does privatization affect a company's shareholders?

    The most recognized transition between the private and public markets is an initial public offering (IPO). Through an IPO, ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center