Drag-Along

A drag-along right allows a defined majority of shareholders — typically a combination of the board, preferred investors, and common shareholders — to compel all remaining shareholders to approve and participate in an acquisition on the same terms. Without drag-along, a small minority shareholder could block an M&A deal by refusing to consent.

Drag-along provisions protect the majority from minority holdouts and make M&A deals cleanable. They are nearly universal in VC-backed company shareholder agreements. For employees and small secondary buyers holding common shares, drag-along means they cannot block a deal they dislike — they can only accept the terms or, in some cases, exercise appraisal rights.

Illustrative example: a strategic acquirer offers $500M for a company. 80% of shareholders (by threshold defined in the shareholder agreement) vote to approve the sale. The remaining 20% — including some employees who believe the company is undervalued — are dragged along at the same $500M price. Their consent is not required.

The edge the pros know: drag-along thresholds matter enormously. Some agreements set the threshold at a simple majority of each class; others require approval from a supermajority of preferred shareholders, effectively giving major VC investors veto power over any drag-along. Review the exact threshold provisions and which classes control them before assuming a small stake gives any meaningful exit control.