The tag-along is a legal clause, usually included into in your Partnership Agreement providing that if one of the shareholders wishes to sell all or part of its shares to a third party, the other shareholders have the right to sell also in proportion to their shares held, under the same conditions and at the same price. There are as many clauses of tag-along as there are businesses, from the simplest to the most complex.
We believe that this clause is important at launch to prevent one of the shareholders from selling shares on the side, to the detriment of the rest of the team. It provides for simple notification and good faith negotiation in the event of conflict.
On the other hand, the drag-along clause is more dangerous. It allows a minority shareholders to be forced to sell its shares if the majority of the company's shares are put up for sale.
This clause is highly appreciated by investors in the Partnership Agreement because it protects the interests of the company when it is ‘mature', but it is perfectly useless at launch because the company's value is de facto very weak. Indeed, an investor could make an attractive offer (but far from the future value envisaged by the shareholders) to one of the majority shareholders who, if they accepted, would force everyone to sell.
This is why Made in Law’s documents proposes a simple and easy to implement tag-along clause.