Drag-along and tag-along rights explained, with an example

Drag-along: making a sale possible

Buyers usually want 100% of a company. Without a drag-along, a few small shareholders could block a sale or hold out for a better price. A drag-along protects the majority, and the deal, by letting the agreed majority require the rest to sell their shares at the same price and on the same terms, after any liquidation preferences are applied.

Tag-along: protecting the minority

A tag-along, also called a co-sale right, works the other way. If a founder or another large holder sells shares, the tag-along holders can sell the same proportion of their own shares to the buyer at the same price. It stops a founder cashing out alone, and stops minority holders being left with a new controlling shareholder they did not choose. Some tags apply to any sale; others only to a sale that changes control.

Typical terms

• Drag threshold: commonly approval from the board and holders of a majority or supermajority of shares, often with separate consent from a majority of the investors.
• Price protection: investors often negotiate that they cannot be dragged below a minimum return, or before a set date, without their consent.
• Limited obligations: dragged holders give only basic warranties, such as owning their shares, and their liability is capped at what they receive.
• Tag exceptions: transfers to family trusts or affiliates, and sometimes small founder sales below a set limit, do not trigger the tag.
• Order of rights: a right of first refusal usually applies first, then the tag-along.

Worked example

Illustrative figures, ignoring liquidation preferences for simplicity. A company has 10,00,000 shares: Founder A 4,00,000 (40%), Founder B 2,00,000 (20%), a venture fund 3,00,000 (30%) and angels 1,00,000 (10%). The SHA lets holders of 75% of the shares, including the fund, drag the rest.

Drag: a buyer offers ₹200 crore for the whole company, or ₹200 crore ÷ 10,00,000 = ₹2,000 a share. Founders A and B and the fund hold 90%, above the 75% threshold, so they can make the angels sell too. The angels receive 1,00,000 × ₹2,000 = ₹20 crore, the same price per share as everyone else.

Tag: suppose instead Founder A agrees to sell 2,00,000 shares, half of their holding, to a strategic investor at ₹1,500 each. The fund has a proportional tag, so it can sell half of its 3,00,000 shares, 1,50,000, at ₹1,500, receiving ₹22.5 crore. If the buyer will not take the extra shares, agreements commonly cut back the founder's sale so both sell in proportion.

Drag and tag in Indian SHAs

In India these rights sit in the shareholders' agreement and are normally copied into the articles of association, because restrictions on transferring shares that appear only in a private contract may not bind the company. Investor SHAs often include an exit timeline: if there is no IPO or sale within an agreed number of years, investors may gain the right to find a buyer and drag the founders. Where a resident and a non-resident are on opposite sides of a transfer, foreign-exchange pricing rules apply, which can affect the price at which shares are dragged or tagged. Terms are negotiated and the law changes, so have a lawyer draft and review them.

What founders should negotiate

• A drag threshold that needs the founders' or ordinary shareholders' approval, at least for the first few years.
• A minimum price below which the drag cannot be used without founder consent.
• Limited warranties and capped liability for dragged holders.
• Room for small founder secondary sales without triggering the tag.