Drag-Along & Tag-Along Rights UK: Seed Funding Guide

Overview

Drag-along and tag-along rights are contractual provisions, usually found in a shareholders' agreement or a company's articles of association. They kick in when someone offers to buy shares in the company, and they control what happens to the shareholders who are not part of the initial deal.

A drag-along clause lets a defined group of shareholders, often those holding a set majority percentage, force the remaining shareholders to sell their shares to the same buyer on the same terms. The purpose is to deliver the buyer a clean 100 per cent of the company, which is what most trade buyers want.

A tag-along clause works the other way. If majority shareholders agree to sell to a third party, minority shareholders can choose to join the sale on equivalent terms, rather than being left behind with a new and unfamiliar controlling shareholder.

The two clauses sit side by side because they protect opposite interests: one helps the majority achieve an exit, the other protects the minority from being stranded.

Key steps

1. Read the threshold carefully. The drag-along clause will specify a percentage of shareholders needed to trigger it, often 50, 75 or 90 per cent. Check whether the threshold is calculated by share class, by voting rights, or by nominal value, because each produces a different outcome in a seed-stage cap table.
2. Check what 'same terms' actually means. Both clauses usually require that dragged or tagging shareholders receive the same price per share and the same form of consideration. Look for carve-outs around warranties, indemnities, and whether minority shareholders can be asked to give personal undertakings they would not normally accept.
3. Understand the notice mechanics. Drag and tag clauses contain tight timeframes for serving notices, accepting the offer, and completing the transfer. Missing a deadline can mean losing the right to tag, or being bound by a drag on terms you had not fully digested. Map the timeline before you sign.
4. Look at interaction with the articles. If the shareholders' agreement and the articles of association say different things, the articles usually win on matters of share transfer. Make sure both documents are aligned, and that any transfer restrictions or pre-emption rights do not block the drag or tag when the time comes.
5. Think about future funding rounds. A drag threshold that works at seed may become unsuitable after Series A dilutes everyone. Consider whether the clause should be refreshed at each round, and whether founders should retain a blocking stake or a class-based consent right to prevent a forced sale on unfavourable terms.

Common questions