Tag-Along Rights Definition
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’.
A Little More on What are Tag-Along Rights
‘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.
References for Tag Along Rights
Academic Research on Tag Along Rights
Specific investments, opportunism and corporate contracts: A theory of tag–along and drag-along clauses, Lacave, I. S., & Gutiérrez, N. B. (2010). European Business Organization Law Review (EBOR), 11(3), 423-458. This paper analyses the effectiveness of Tag-Along Rights and the various factors that come into play when exercising them in corporate settings.
International alliance negotiations: legal issues for general managers, Campbell, E., & Reuer, J. J. (2001). Business Horizons, 44(1), 19-26. This paper discusses the legal issues faced by managers in international negotiations.
Contracts and returns in private equity investments, Caselli, S., Garcia-Appendini, E., & Ippolito, F. (2013). Journal of Financial Intermediation, 22(2), 201-217. This paper discusses private equity investment contracts and returns, and the covenants therein.
Evolution of decision and control rights in venture capital contracts: an empirical analysis, Bienz, C., & Walz, U. (2006). This paper traces the evolution of contracts and control rights in venture capital negotiations with an empirical analysis of 464 VC contracts sampled from firms in Germany.
Making a Private Equity/Venture Capital Investment in Japan: Implementing Techniques Commonly Used in US Transactions, Lebrun, K. J. (2002). U. Pa. J. Int’l Econ. L., 23, 213. This paper studies the application of US venture capital techniques in Japanese private investment firms.
Covenants in venture capital contracts: Theory and empirical evidence from the German capital market, Antonczyk, R. C., Breuer, W., & Mark, K. (2007). In Venture Capital in Europe (pp. 233-247). This paper studies VC contracts in the German VC investments market.
1 6 Covenants in venture capital contracts: Theory and empirical, Antonczyk, R. C., Breuer, W., & Mark, K. (2011). Venture Capital in Europe, 233. This paper explores the contracts and covenants widely deployed in European VC markets, discusses the theoretical approach and examines empirical data.
Venture Debt Financial Instruments and Investment Risk of an Early Stage Fund, Kwiatkowski, S. (2015). Prace Naukowe Uniwersytetu Ekonomicznego we Wrocławiu, (381 Financial Investments and Insurance-Global Trends and the Polish Market), 177-184. This paper explores the VC and Debt financial instruments and analyses the risks factors of early stage funds in the Polish investments markets.
Contracts and Performance in Private Equity Investments, Caselli, S., Garcia-Appendini, E., & Ippolito, F. (2010). This paper examines the impact of investment contracts in private equity firms and its impact on performance.
On the Use of Preferential Rights in Intellectual Property Agreements, Bellemare, A. (2016). This paper explores the four different types of Preferential rights included in Intellectual Property Agreements.
Contracts with Benefits: The Implementation of Impact Investing, Geczy, C., Jeffers, J., Musto, D. K., & Tucker, A. M. (2018). This paper discusses the widespread adoption of Impact Investing in private equities and VC firms.