Drag-along provisions are clauses in a stock option plan or some other form of agreement which grant investors and shareholders the right to compel the founders and other stockholders to vote in favor of (or otherwise agree to) the sale, merger or other “deemed liquidation” of the company. These provisions are an important protection for investors who seek to exit their investment.
Drag-along provisions can be important in a situation where a few minority stockholders are holding-up a transaction approved by a supermajority of the stockholders — thus requiring, for example, a freeze-out merger.
Takeaway:
- The barriers to exiting an investment can be minimized by a drag-along provision.