Drag Along

Explaination: A Drag Along with right holder (“DARH”) allows a shareholder to force the other shareholders of the Startup to sell their shares along with the shares of the DARH to any third party. It is to be noted that a Drag along right is an onerous clause

How it applies to Startup/Investor and its impact: Generally, an Investor holds the Drag Along Right on the Founder to drag the Founders (after the expiry of the Exit Period). by selling the shares of the Startup to a third-party in the event the Startup or the Founders are unable to provide an exit to the Investor through other means (such as buyback, IPO, business transfer) and if that third party intends to acquire more percentage of shares than what such Investor holds.

A Founder may have a Drag Along right on an Investor when investment takes place in a Startup that has matured enough to sustain itself and the Founder is looking to get the Startup acquired by an established business. However, it is to be noted that such a right is provided to Founder in very rare circumstances and only after a substantial growth of the business.

Note for Startup – Ideally a Startup should not provide a Drag Right to the Investor anytime after the Series A Funding, considering the Startup has started showing signs of profitability and businesss stability

Note for Investors – An Investor should only use such Drag Right in the event the Start up has failed to show signs of profitability or business stability even after the end of a minimum 5 year exit period.

Ideal position – Ideally prior the Startup should have a 1 year buffer period after the expiry of the exit period before an Investor can enforce a Drag Right