Meaning
A contractual right in a shareholder agreement allows minority investors to participate in a sale of shares initiated by a majority owner. This mechanism, known as a tag along right, prevents majority shareholders from exiting the company while leaving minority holders locked into an illiquid business. It guarantees that smaller investors receive the same valuation, terms and payment methods as the founders or early venture funds.
Co-sale Privilege
Inclusion of this clause in the corporate bylaws ensures that any buyer of a controlling stake must extend their offer to all eligible shareholders. When a tag along event is triggered, the majority seller must reduce their own transaction volume to accommodate the participating minority shares. This process maintains balance and fairness during major equity shifts.
Liquidity Assurance
Secondary sales of this nature provide rare exit opportunities for small stakeholders who would otherwise remain trapped in a private company. They secure immediate liquidity.
Shareholder Protection
Exercising the tag along option protects early team members or angel investors from being left with diminished influence under a new, unknown majority owner. It ensures that the value created by the firm is distributed equitably during a buyout. This legal constraint makes the startup more attractive to early investors who require a clear path to liquidity.
