Tag Along Right

Explaiantion: Tag along rights allow minority shareholders to join in a transaction wherein a majority shareholder is selling their stake in the company. With the inclusion of a tag along rights clause the majority shareholders must include the holdings of a minority shareholder while negotiating the sale of the stake.

Tag along rights allow minority shareholders to join in a transaction wherein a majority shareholder is selling their stake in the company. With the inclusion of a tag along rights clause the majority shareholders must include the holdings of a minority shareholder while negotiating the sale of the stake.

How it applies to Startup/Investor and its impact: Investors put money not only on the business of the Start-up but they also look other factors like Founders and their team before investing in the Start-up. If the Founder is selling such portion of shares that can lead to a change in control i.e. if the Founders want to sell all of their shares or 50% of their shares, then Investors would not want to be a part of that Start-up anymore. In such circumstances, Tag-Along right plays a major role. It allows Investors to sell their shares along with the Founder’s shares to the party who is willing to purchase the Founder’s shares and on the same terms on which the Founders are selling their shares.

In case the Founder’s sell only some part of their shares then Investors would want to negotiate for selling their shares by tagging themselves if the Founder on the Pro-rata basis. But in case the Founder is selling its majority of the shares and which could lead to change in control then they have a right to sell their entire shareholding and exit from the Start-up and in such an event investors shares will be given preference over the Founder’s shares.