
The Flawed Terms in VC Deals - wheels
http://babblingvc.typepad.com/pjozefak/2009/08/the-flawed-terms-in-vc-deals.html
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lucumo
For those that don't know what a drag along clause is:
<http://www.investorwords.com/6495/drag_along_right.html>

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mattm
"A right that allows majority shareholders to force minority shareholders to
accept an agreement"

I don't understand. Wouldn't the majority be able to force a decision
regardless of whether they have this clause or not?

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fatdog789
It's generally applied where a 2/3/supermajority would normally be required
for approval of organization-altering decisions -- a drag along allows a
simple majority to force approval.

The concept is taken from partnership law, where dissolution can be forced
upon all partners even if only a handful of partners vote for it -- the
partnership assets are liquidated and the proceeds distributed.

A drag along basically forces the organization to liquidate if the majority
shareholders want to -- and prevents the minority shareholders from taking any
steps to challenge it.

Drag along provisions are generally unenforceable in America if they prevent
the minority shareholders from filing court action to challenge the
transaction, or otherwise prevent minority shareholders from exercising rights
under the law or under the contract which are not expressly waived in the
language of the drag-along provision itself.

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sgrove
Interesting read, but I would have liked to hear more about which terms are
generally put in as boilerplate, and which the VC will most often invoke in
order to manipulate situations they don't care for.

Also, hearing that the original founders make for the best exit is very
interesting indeed, obvious as it may seem. I'm very curious about how he
defines "best exits"...

