What are Tag-Along Rights?

In venture capitalism, contractual obligations used to protect the interests of minority shareholders are known as Tag-Along Rights. These rights allow minority shareholders to tag along with majority shareholders in selling their stakes in a firm. The onus of including the minority shareholders concerns in the sale negotiations is on the majority stakeholders, who are so obliged in light of Tag-Along Rights.

How are Tag-Along Rights Used? 

Tag-Along Rights are usually incorporated in startups and firms with exponential growth potential. It accords minority shareholders the ability to reap the same kind of benefits that large stakeholders like venture capitalists or financial institutions with large deals benefit from. They can get a share of the larger pie negotiated by the venture capitalists who have more purchasing power. Tag-Along Rights afford minority stakeholders better liquidity options in selling of private equity shares.

An Example of Tag-Along Rights

In startups and entrepreneurial firms, angel investors, cofounders, and other stakeholders bank on Tag-Along Rights to divest their shares in the secondary markets. For e.g., suppose two individuals launch a firm that attracts venture capitalists. 50% stake in the firm is bought by a single entity making it the majority shareholder. This deal is also inclusive of Tag-Along Rights for the cofounders. Once the firm is successful, the majority stakeholder is looking to sell off its 50% stake at a handsome profit. If they manage to find a buyer, the cofounders can tag along in this deal and sell their stakes at the premium price negotiated by the majority stakeholder, bringing them the same benefits even as minority stakeholders.