What are Tag-Along Rights?
How Do Tag-Along Rights Work?
Let's say Company XYZ is a start-up firm looking for shares with tag-along rights.
Company XYZ also talks to a venture capital firm, which agrees to invest so much that it becomes a 55% owner in the business (giving it the majority interest).
The venture capital firm helps run the company and make it a success. Five years later, it wants to sell its stake in the business and finds a buyer, Company A, which offers to buy the shares for, say, $20 each. Because the minority shareholders have tag-along rights, they can join with the venture capital firm and their shares for to Company A at $20 too.
Why Do Tag-Along Rights Matter?
Tag-along rights are usually good for minority shareholders because they allow the shareholders to capitalize on a deal that another shareholder is able to strike. In particular, a may have access to potential buyers and may be able to negotiate better or pricing than the minority shareholders can. Additionally, it can be difficult to find buyers for of private companies; having tag-along rights allows minority shareholders to jump on an opportunity at liquidity.
One of tag-along rights is that the buyers of those shares (Company A, in our example) can end up with a very large majority interest in the acquired company, which may unsettle the remaining shareholders and may a new board of directors or new management is on the way.