Drag-Along Rights: Threshold, Exceptions, Founder

Drag-Along Rights: Getting to an Exit Cleanly

A drag-along right lets a specified majority of shareholders force minority shareholders to sell in an acquisition. Without it, a single 5% shareholder can block a sale. With it, an M&A deal that most shareholders want can close over minority objection. Standard in every priced round.

Standard threshold structures

Common: majority of preferred + majority of common + board approval. This structure prevents any single class from blocking or forcing a sale unilaterally. Investor-favorable variant: just majority of preferred (or even just lead preferred) — push back, this eliminates common shareholder protection.

Founder-friendly modifications

Require CEO consent (if founder is CEO) for drag-along trigger. Require minimum acquisition price (e.g., must exceed liquidation preference by 2x). Exempt drags below certain valuations. Include tax gross-up (acquisition proceeds must cover any tax on founder's stock). These protect founders in low-price exits.

What drag-along doesn't cover

Non-cash considerations (stock deals require additional negotiation). Earnouts (subject to separate agreement). Post-close employment terms (founder can decline employment while still being dragged on shares). Post-close indemnification (typically capped for common shareholders).

Interaction with liquidation preference

Drag-along ensures the sale happens; liquidation preference determines who gets what in the sale proceeds. In a modest exit, drag-along may force a sale where common shareholders receive nothing after preferences pay out. Model your waterfall at multiple exit prices to understand the drag-along risk.

Frequently asked questions

Can founders block a drag-along?

Only if the drag-along structure requires common shareholder majority (which founders typically control at seed/Series A). By Series B+, founders often no longer hold common majority and cannot unilaterally block.

What's a fair drag-along threshold?

Majority of preferred + majority of common + board approval, with minimum price threshold that returns at least 2x preferred to common shareholders. Any structure weaker than this is investor-favorable.

Does drag-along apply to secondaries?

No — drag-along applies to sale of the entire company. Secondary sales of individual shareholders' stock are separate and typically not covered by drag-along.

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