A contractual right of one (or some) shareholders to convince all other shareholders to sell their equity to a third party on the same terms as the sale of their shareholding. This helps protect the interests of all shareholders so they can enjoy the benefits of higher return on their sale. It’s also called the ‘bring along’ right.
Usually, majority shareholders have a drag-along right. However, it is often seen that VC and PE investors – even when they have a minority shareholding – have a contractual right to drag the founders and other shareholders along in a sale negotiated by the investors. However, the drag along right is available only under certain conditions – for example, if investors have not got an exit at the end of an agreed duration and remain shareholders, or if the company or founders have committed fraud or a substantial breach of agreements.
In an event of the drag sale, the founders and other shareholders shall be required to sell their shares on the same terms and price as those determined by investors.