Tag Along and Drag Along rights come up frequently in negotiations between venture capitalists and the companies they invest in. Tag along rights ensure that minority stock holders receive the same compensation as majority holders if the majority negotiates a deal to sell its stock. Similarly, drag along rights would force minority stockholders to sell their shares if the majority holders do.
Q. OK, we know from the fact that you’re down at the VCIC competition today that these must be venture capital terms. So what they mean?
A. They’re a big subject of negotiations when VCs invest in a company. They refer to the rights that shareholders have with each other. Essentially, tag along rights ensure that minority investors get to “tag along” with the majority if that group, for example, sells their shares.
Q. Hmmm, Ok, sounds like “Drag along” must be the opposite.
A. Yes, these allow majority shareholders to “drag” minority holders into deals rather than allow the minority to block something. Obviously, lots of room for negotiations on exactly how and when, and for what sorts of deals, these rights kick in; so later on we’ll see how the teams handle them.
Q. Right. So, this competition is a bit unusual, right? Its not the usual, where you’re judging which startup business plan is best.
A. Nope. It’s a competition among MBAs from Yale, Columbia, Cornell, and several others who form virtual VC firms. The judges watch them perform due diligence on two real startups, drill down on the strategy and business plans, and negotiate term sheets. So it’s about which of the teams is the best group of VCs, not which startup is best.
Q. Is this a national competition?
A. Yes, its been a big national competition for about 15 years. Today is the NE regional final, and the winners go on to the national championship. It’ll be the Venture world’s version of March Madness.
Q. And who’s winning right now?
A. Funny: I don’t know. The teams all have code names, and are intentionally not identified by school, so that we’re not influenced by that. So I definitely have a favorite at this moment, but I don’t know which school they’re from. Maybe after it’s over we can bring the team on MM..