Brian Nichols is the co-founder of Angel Squad, a community where you’ll learn how to angel invest and get a chance to invest as little as $1k into Hustle Fund's top performing early-stage startups.

Here's the thing about drag along rights: they sound terrifying until you actually understand what they do. Then they're... still kind of terrifying, but at least you know why they exist.

Let's start with the basics. You've built a company. You've raised money from investors. Now those investors own preferred stock, and you (along with your co-founders and employees) own common stock. Fast forward a few years, and someone wants to buy your company. Great news, right?

Not if some of your shareholders decide they don't want to sell.

The Problem Drag Along Rights Solve

Picture this: a buyer offers to acquire your company for $50 million. Your investors are thrilled. Your board approves it. But there's one problem—a few early angel investors who own 5% of the company refuse to sell. They think the company will be worth more in a few years.

The buyer walks away. Nobody wins.

This is exactly the mess that drag along rights prevent. These provisions allow majority shareholders (usually investors once you've raised enough capital) to force minority shareholders to join a sale on the same terms. The minority gets "dragged along" whether they like it or not.

Sounds aggressive? It is. But there's method to the madness.

Why VCs Push For This

Most acquirers want 100% ownership. They don't want to deal with holdout shareholders who could sue them later or complicate the deal. According to Delaware law, you only need a simple majority to approve an acquisition, but in practice, buyers typically demand 85-95% approval to minimize legal headaches.

Drag along rights solve this cleanly. When VCs invest, they're thinking about the exit from day one. They need a mechanism to ensure they can actually liquidate their investment when the time comes. Without these rights, a small group of minority shareholders could effectively hold the entire company hostage.

From the investor's perspective, this makes total sense. They've put millions into your company with the expectation that they'll eventually be able to sell their stake. Drag along rights are insurance against that exit getting blocked.

What Founders Actually Need to Know

Here's where it gets interesting for founders. Not all drag along provisions are created equal, and the details matter way more than you think.

First, pay attention to the triggering threshold. Some agreements require just 51% of shareholders to trigger a drag along. Others require two-thirds. The higher the threshold, the more protection you have as a minority shareholder. Push for this in negotiations.

Second, look at board approval requirements. Some drag along provisions only kick in if the board approves the transaction. This gives founders (who usually have board seats) a say in the process. VCs often resist this, but it's worth fighting for.

Third, understand minimum price protections. This is huge. Thanks to liquidation preferences, it's possible for a sale to leave common stockholders (that's you and your employees) with absolutely nothing. If your investors have a 2x liquidation preference and the company sells below that threshold, they get paid first. The drag along right could force you to vote for a deal where you walk away empty-handed.

The Trados case is the nightmare scenario here. The board approved a merger below liquidation preference. Common stockholders sued for breach of fiduciary duty and lost. Yes, you can get dragged into a deal where you literally make nothing.

Push for a minimum sale price in your drag along provision. This protects you from scenarios where investors cash out while founders and employees get zero.

Tag Along Rights: The Friendlier Alternative

Some founders negotiate for tag along rights instead, which give minority shareholders the option to participate in a sale but don't force them to. This is way more founder-friendly, though investors are less likely to agree to it because it doesn't solve their holdout problem.

If you can't avoid drag along rights entirely, at least make sure they're balanced with strong protections.

The Reality Check

Look, drag along rights aren't inherently evil. They exist because exits are complicated and buyers want certainty. For successful companies, these provisions rarely even come into play. Everyone's happy to sell when the price is right.

The real risk is for companies that don't hit their targets. When there's a mediocre offer on the table and investors want to cut their losses, that's when drag along rights get exercised—and that's when founders need to have negotiated good protections upfront.

My advice? Don't get freaked out when you see drag along provisions in a term sheet. They're standard. But read the fine print. Push for board approval requirements, minimum price protections, and several liability. Your lawyer should help you negotiate these terms, and if they don't bring them up, find a better lawyer.

The key is understanding that venture capital is a partnership, but it's also a business. Investors need exit mechanisms. Founders need protections. The best deals balance both interests clearly from the start.

If you're navigating these complex fundraising conversations and want to learn from investors who've been on both sides of the table, Angel Squad offers the community and expertise you need to make smarter decisions about term sheets, investor relationships, and your company's future.