Drag-along rights / Co-selling obligation

The co-selling liabilities is a clause of the investor agreement. This gives the opportunity for the majority of shareholders to force the minority owners to sell their shares: at exactly the same price, terms and conditions as any other seller sold their own shares.

The co-selling liabilities is a particularly important right of control in all rounds of startup venture capital investments. It is an important part of the term sheet. 

This right is particularly important because a significant number of capital investors seek to gain complete control during the acquisition. It may even turn investors away from this intention if an early angel investor tries to stay in control. Drag-along creates an opportunity to liquidate the minority ownership shares and sell the company 100 percent.

Although drag-along is a relatively clearly interpretable right, the meaning of majority and minority in the term sheet must always be thoroughly clarified. It must also be determined how the preferred and ordinary shares behave in such a case. Thinking here about which types of shares have voting rights in addition to ownership, and which types of shares are included in the concept of a majority of shares.

At first glance, drag-along appears to limit the rights of minority owners, but it can also have a beneficial function for them. The drag-along stipulates that during the sale, the minority owners can also part with their ownership under the same conditions as the majority. It is therefore not possible for the majority owner to sell the shares at a more favorable price during the acquisition. Thus, this is not only a burden and liabilities for the minority owners, but also a right to an appropriate exit.

The counterpart of the drag-along right is the tag-along, which is no longer a sales liabilities, but merely an opportunity for the owners. In the case of tag-along, if, for example, the founder sells his own share, the investor also has the right to part with his shares under the same conditions. In this way, for example, the minority investor can be prevented from getting stuck in the investment if the majority owner exits the company and transfers control to the buyer of his shares. The buyer would then have no particular interest in the acquisition of the minority investor's share. 

In addition to these, the stipulation of anti-dilution protection is also a common clause. This protects the investor against a decrease in the proportion of his share in the case of subsequent investment rounds.