Do tag-along rights apply to fundraising rounds?

No — tag-along rights apply to secondary sales (when shareholders sell existing shares to third parties), not primary issuances (when the company issues new shares to raise capital). New share issuances are covered by pro-rata/pre-emptive rights, which are a different mechanism.

Can founders waive tag-along rights?

Founders can negotiate for tag-along rights to not apply to small secondary sales (e.g., founder secondary below ₹10 crore), to not apply to family transfers, or to have automatic waiver if the secondary transaction goes through approved exchanges. These carve-outs are negotiable at term sheet stage.

What happens if an acquirer doesn't want to buy the tag-along shares?

If an acquirer is only willing to buy the major shareholder's stake but not the tag-along shares, the major shareholder cannot complete the sale unless tag-along rights are waived by the minority shareholders. This gives minorities real blocking power in secondary transactions.

Glossary

Tag-Along Rights

Name: AletheiaAI
Author: Amit Tyagi

A clause that lets minority shareholders sell their shares on the same terms when a majority shareholder sells — protecting small holders from being left out.

By Amit Tyagi, Fitoor Capital · AletheiaAI Glossary

Definition

Tag-along rights (also called co-sale rights) protect minority shareholders by giving them the right to participate in any sale of shares by a majority shareholder. If a founder or large investor sells their stake, minority shareholders can "tag along" and sell their pro-rata share at the same price and on the same terms.

The protection: without tag-along rights, a major investor could sell their stake to an acquirer at a premium while leaving minority shareholders holding shares in a company with new (potentially worse) controlling shareholders. Tag-along ensures minorities get the same deal or nothing.

India Context

Tag-along rights in Indian SHAs apply primarily to secondary sale transactions (not new share issuances). If a founder sells a secondary stake, investors with tag-along rights can require the acquirer to also buy their shares at the same terms. This is particularly relevant when PE or growth investors buy secondary stakes from founders — existing angel/seed investors may have tag-along rights that complicate the transaction.

Example

A founder with 40% equity negotiates to sell 15% to a PE firm at ₹500 crore valuation. Seed investors (15% combined) have tag-along rights. They can require the PE firm to also buy up to their 15% at the same ₹500 crore valuation. If PE wants to buy exactly 15% total, it can either buy only 15% from the founder (not triggering full tag-along) or buy 30% total if all tag-along rights are exercised.

Frequently Asked Questions

Related Terms

Drag-Along Rights

A clause that allows majority shareholders to force minority shareholders to par…

Right of First Refusal

A clause giving existing shareholders the first opportunity to buy shares before…

Secondary Sale

When existing shareholders sell their shares to new buyers without the company i…

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