What are Tag Along Rights?
Tag along rights are legal shareholder agreements that guarantee minority stakeholders the right to sell their shares in the company at the same time and under the same conditions as the majority stakeholder.
Tag along rights could be part of a venture capital deal where there are few majority shareholders (PE / VC Firms) and scattered minority holders (think friends and family and employee shareholders). These rights are often used when companies are founded and capitalized because it protects investors while encouraging them to buy the company's stock at an early stage.
Advantages of Tag Along Rights
- Tag along rights protect current minority stakeholders.
- Tag along rights also encourage larger investors to invest early, as they are better protected as (often) the only major shareholder.
Disadvantages of Tag Along Rights
- Tag along rights can make the selling/exit process more difficult when the potential buyer doesn't want to change the terms of their offer in order to please minority shareholders.