Tag along Rights
What are tag along rights?
Tag along rights (also called co-sale rights) give a minority shareholder the contractual right to join in any sale of shares by a majority shareholder, on the same price and terms. If a founder sells a secondary block of shares, tag along rights allow early investors or early employees to sell a proportional amount of their own shares in the same transaction.
Why do tag along rights matter for early investors?
Without tag along rights, a majority shareholder could sell their position at a premium to a strategic buyer while minority holders are left with shares in a company where control has now shifted to an unknown party. Tag along rights ensure minority holders are not trapped in a position they did not consent to joining.
How do tag along rights work in a secondary share sale?
| Scenario | How tag along applies |
|---|---|
| Founder sells 20% stake to secondary buyer | Investor with tag along can sell 20% of their own holding at the same price per share |
| Buyer declines to purchase additional shares | Founder must reduce their sale size to make room for the tagging shareholder |
| Acquisition of 100% of company | Tag along merges with drag along; all shareholders sell on the same terms |
| Buyer agrees to purchase all tagged shares | Transaction proceeds for all sellers at the same price per share |
Tag along rights are standard in the NVCA model investor rights agreement and are negotiated alongside drag along provisions, pro rata rights, and information rights as part of the standard Series A shareholder rights package.
How do tag along rights interact with ROFR in a secondary share sale?
Tag along rights (co-sale rights) and right of first refusal operate in sequence. ROFR is exercised first: existing holders (company, then investors) have the right to purchase the seller's shares at the offered price before the sale proceeds to a third party. If ROFR holders waive, tag along holders then have the right to join the sale by selling their own shares alongside the seller, pro-rata to their ownership. The total transaction size typically stays constant, meaning the seller's allocation is reduced to accommodate tag-along participants. A founder planning to sell 500,000 shares may find that after tag-along exercises by investors holding 20 percent of shares, they can only sell 400,000 shares, with the remaining 100,000 going to the investor's pro-rata participation.
What triggers tag along rights and how are they exercised?
Tag along rights are triggered when a shareholder (typically a founder or major common stockholder) proposes to transfer shares to a third party for consideration. The tag along holder must be notified of the proposed transaction terms (price per share, buyer identity, payment terms) within the notice period specified in the investor rights agreement (typically 20 to 30 days). The tag along holder then elects to participate by notifying the seller within the exercise window. If they elect to participate, they sell their own shares on the same terms as the seller. The NVCA model investor rights agreement includes standard tag along provisions with thresholds that exclude small transfers from triggering the right, such as transfers to family members or estate planning entities.
What do founders get wrong with tag along rights?
The most common mistake is not reading which transfers trigger tag along rights. Transfers to family trusts, estate planning vehicles, or as gifts to family members typically do not trigger tag along, but this exemption must be explicitly stated in the agreement. Founders who transfer shares to a family trust without checking their investor rights agreement may inadvertently trigger tag along rights, exposing themselves to liability if investors claim the right was not offered.
A second error is not including a minimum threshold below which tag along does not apply. Without a threshold, even a $50,000 secondary transfer by a founder triggers the full tag along notification and exercise process for all investors. This creates administrative overhead disproportionate to the transaction size. Founders should negotiate a minimum transfer threshold (often $500,000 to $1M in transaction value) below which tag along rights are not triggered.
Third: founders sometimes view tag along rights as purely investor-protective and fail to negotiate reciprocal tag along rights for themselves. If an investor sells shares, should the founder have the right to join the sale? In most standard agreements, tag along rights only run in favour of investors (against founder transfers). Founders with significant common stock ownership should consider negotiating reciprocal co-sale rights on investor-to-investor secondary transactions.
How it works in practice
Case example: Seed investor uses tag along in secondary sale
A Series A founder wants to sell $1M of personal shares to a growth equity firm as a secondary transaction. The seed investor holds 8% of the company and has co-sale rights. The growth equity firm offers $10/share.
Tag along triggered: the seed investor is entitled to sell up to 8% of the total secondary block at $10/share. The founder's $1M block is 100,000 shares. The seed investor can tag along on 8,000 of those shares ($80,000 of liquidity).
The growth equity firm agrees to buy the full 108,000 shares at $10/share ($1.08M total). The founder gets $920K; the seed investor gets $80K of liquidity. Both get exit at the same price. This is exactly what tag along is designed to achieve: co-sale on equal terms.
Frequently asked questions
Do tag along rights apply to all share transfers?
No. Most agreements exempt transfers for estate planning, to family trusts, to affiliates, or to immediate family members. Only arm's length sales to unrelated third parties trigger tag along rights. The specific exemptions are defined in the investor rights agreement.
What happens if the buyer refuses to buy the tagged shares?
The original seller must either reduce their sale size to make room for the tagging shareholder, or the deal falls through on its original terms. The seller cannot simply proceed and leave the minority holder behind; doing so is a breach of the tag along contractual obligation.
Is tag along the same as drag along?
No. Tag along gives minority holders the right to join a sale if they choose. Drag along forces minority holders to join a sale whether they want to or not. They are complementary rights that appear in the same agreement: drag protects majority sellers and acquirers; tag along protects minority holders.
Can tag along rights be waived for a specific transaction?
Yes. The holder of tag along rights can waive them for a specific sale. This is common when a minority holder is comfortable with the buyer and the price and does not want the additional complexity of joining a secondary transaction.
Do tag along rights apply when a founder transfers shares to a family trust?
Usually no. Standard investor rights agreements explicitly exempt transfers to family trusts, estate planning vehicles, and immediate family members from tag along and ROFR obligations, provided the shares are not being sold for consideration. Founders planning estate planning transfers should confirm these exemptions are explicitly listed in their agreement before proceeding, as poorly drafted agreements sometimes fail to include them.
Related glossary terms
- Drag Along Rights, the complementary right that forces minority holders to join a sale, opposite in direction to tag along
- Right of First Refusal, gives existing holders the right to buy before a third-party, precedes tag along in the transaction sequence
- Pro Rata Rights, another shareholder right negotiated alongside tag along at Series A
Explore related Fintera content
- How to Prepare Financials for a Series A Raise, the full Series A process where shareholder rights including tag along are negotiated and documented
- When to Hire a CFO: 9 Signs It's Time, when equity structure complexity signals the need for senior finance and legal oversight
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