Tag-Along Rights

As per the tag-along rights clause, it also goes by the name as “co-sale rights.” These imply contractual obligations that are used for protecting the minority shareholder that might be present in the given venture Capital deal. In case the minority shareholder goes forward with selling the respective stake, then it would give him or her the right consider joining the given transaction while selling the minority stake in the organization.

Tag-alongs tend to effectively oblige the respective Majority Shareholder for including the holdings of the given minority shareholder in the available negotiations such that there happens the exercising of the tag-along rights.

Getting an Understanding of the Tag-Along Rights

These rights can be referred to as pre-negotiated rights that the respective minority shareholder would consider including during the initial issuance of the stock of the company. The rights are known to enable the minority shareholder in selling the respective share in case the majority shareholder would be negotiating some sale for the respective stakes. Tag-along rights are known to be highly prevalent in the startup organizations as well as other private companies with significant upside potential.

The rights offer minority shareholders the overall capability of capitalizing on the given deal that some larger shareholder –mostly some financial institution with significant pull –will be putting together. Major shareholders like venture capital organizations, imply a greater capability of sourcing buyers while negotiating the existing payment terms. Therefore, tag-along rights offer minority shareholders with improved liquidity. It is immensely difficult to sell private equity shares. However, majority shareholders are often known to facilitate both sales as well as purchases on the secondary Market.

Instance of Tag-Along Rights

Angel investors, co-founders, and venture capital organizations are mostly known to rely on the given types of rights. For instance, let us think that three co-founders go forward with launching a tech company. The business might be going great. At the same time, co-founders feel that they have been capable of proving the concept properly for scaling. Then, the co-founders go ahead with seeking outside investment as seed round.

A private angel investor might observe the desired value of the firm while Offering to purchase around 60 percent of the same. This would require a huge amount of equity for compensating the overall risk of Investing in some small company. The co-founders would then accept the investment and would make the angel investors the largest forms of shareholders.

The investor could be tech-focused while having major relationships with large-sized, public-based tech companies. The co-founders of the startup company are well-aware of the same. Therefore, they go ahead with negotiating the tag-along rights in the respective investment agreement. The business would continue growing consistently in the course of the next years. As such, the angel investor who would be content with the investment return would be searching for a buyer of the respective equity amongst leading tech companies.