Key Takeaways

  • A co-sale right (also called a tag-along right) lets minority shareholders sell their shares alongside a majority shareholder under the same terms and conditions.
  • These rights protect small investors from being left behind in a sale and ensure fair treatment when major shareholders sell their shares.
  • co-sale provisions are often paired with a right of first refusal (ROFR) clause, which gives current shareholders or the company a chance to buy shares before they are offered to an outside buyer.
  • Typical co-sale agreements outline triggers, notice procedures, proportionate sale participation, and exceptions (such as transfers to family or affiliates).
  • While co-sale rights help maintain balance among investors, they can also complicate future sales or acquisitions if too many parties are entitled to join.

What Are Co-sale Rights?

Co-sale rights, also known as tag-along or (less often) take-me-along rights, are the rights of minority shareholders to join in when the majority shareholder or the founders sell their stock. Therefore, if the company's original owner sells his or her stock to a corporation for $20 per share, every investor with a co-sale right can get the same deal.

Co-sale rights are usually paired with the right of first refusal, or ROFR. With an ROFR clause, a company or its shareholders can buy the majority shareholder's stock if he or she decides to sell to a third party. This lets the current investors keep control of the company in case they don't like the third-party investor.

For example, say a company called Unlimited Clocks has five founders with 10 percent control each, a venture capital firm that owns 30 percent of the business, and 100 employees and small investors with 20 percent control between them. One day, all five founders decide to sell their stock to Super Unlimited Clocks for $15 per share.

The venture capital firm has an ROFR, so they can buy all the founders' stock for $15 each if they want and cut SUC out of the deal. They also have a co-sale right, so they can sell their stock for $15 to SUC and force them to buy up to 80 percent of the company instead of 50. Some of the employees and small investors might have ROFR and co-sale rights, too, but others might not.

How a Co-Sale Agreement Works

A co-sale agreement specifies the conditions under which minority shareholders can participate in a share sale by a majority or founding shareholder. When a controlling shareholder decides to sell their shares to an outside buyer, those with co-sale rights receive written notice of the transaction. The notice typically outlines the sale terms, price, number of shares, and timeframe to exercise the right.

Shareholders who wish to join the sale can notify the company or the selling shareholder within the stated period. Their participation is usually proportionate—they can sell a percentage of their holdings equal to the percentage of shares being sold by the controlling shareholder. This ensures all parties are treated equally.

In practice, co-sale rights are contractual protections embedded in shareholder or investment agreements to safeguard minority interests. They often coexist with other protective clauses like drag-along rights (which allow majority shareholders to compel a sale) or right of first refusal (ROFR) clauses, which give the company or investors first purchase opportunity.

Why Are Co-sale Rights Important?

  • Larger shareholders can usually get better deals than smaller shareholders. This is because they are often major companies with great negotiators. It's also because the big investment companies that can offer the best deals like to buy big percentages of companies. Co-sale rights let small shareholders take part in these better deals.
  • If a company's founders are all selling, an investor might not want to stick around. A small company's success depends greatly on the people who work there. It can fail quickly if all the important people leave.
  • The third party that's buying the stock may have a reputation for figuratively burning businesses to the ground. The ROFR is there to stop that from happening. However, it's usually an all-or-nothing deal: Either the shareholders buy all the stock for sale or none of it. If they can't get the money, the next best thing is to sell their own stake.

Benefits of Co-Sale Rights for Shareholders

Co-sale rights provide critical protection and fairness for minority shareholders. Without such rights, major shareholders could negotiate favorable terms that exclude smaller investors. Some key advantages include:

  • Equal treatment in sales: All participating shareholders receive the same price and conditions as the majority seller.
  • Protection against dilution of control: By joining a sale, minority shareholders prevent an outsider from gaining disproportionate influence over the company.
  • Transparency in transactions: co-sale provisions require the seller to disclose key deal terms, reducing the risk of insider advantages.
  • Leverage in negotiations: Knowing that minority holders can participate can deter unfavorable deals or encourage better sale terms.

For founders, granting co-sale rights also signals good faith toward investors, building trust and improving the company’s ability to attract funding. Venture capital and private equity investors often require such clauses before investing.

When Co-sale Rights Should Apply

  • Venture capital firms, angel investors, and other people and businesses that invest in companies want to know they won't be left behind when it is time to pay out. Co-sale rights and ROFR guarantee they will be able to take part in a good deal or stop a bad one from happening.
  • Few investors actually use their co-sale rights, but they're still important. By having them, the company's executives will avoid deals that would lead investors to use their co-sale rights.

Common Triggers and Exceptions in Co-Sale Agreements

Co-sale rights usually activate when a founder, majority shareholder, or key investor sells their shares to an outside party. The agreement defines triggering events such as:

  • Direct sale or transfer of shares to a third party.
  • Mergers or acquisitions involving a change in ownership control.
  • Transfers that materially affect shareholder balance or control.

However, most co-sale agreements exclude certain transactions to maintain flexibility. Common exceptions include:

  • Transfers to family members, trusts, or affiliates for estate or tax planning.
  • Internal restructuring or transfers that don’t alter company control.
  • Sales of small share portions below a defined threshold.

These carve-outs prevent administrative complications from minor transfers while still safeguarding against significant ownership shifts.

When Co-sale Rights Shouldn't Apply

  • Co-sale rights often have built-in limits on when a shareholder can use them. For instance, majority shareholders and founders can sell or transfer stock to family members. If they die, the stock can transfer to their estate and heirs. Major shareholders can also sell a few stocks each year without activating the co-sale right.
  • If you're a founder, you'll want to ensure only a few investors have co-sale rights and ROFR. Companies that want to buy your shares won't like it if all your other shareholders can buy them first. Moreover, they won't like having to buy the whole company when they only want 51 percent. Usually, the common stock that the company's employees (but not always the founders) own won't have ROFR or co-sale rights.
  • Co-sale rights generally don't apply to any preferred stock the founders buy back from investors. This stock represents an extra investment in the company outside of their ownership of it. Therefore, the rules for selling it are different.
  • Sometimes investors will want to add ROFR and co-sale rights that trigger when another investor sells their share, not just when the founders sell. However, investors don't like it when this happens to them. This is because it makes it harder for them to sell.

Drafting Considerations and Limitations of Co-Sale Rights

While co-sale rights offer vital protection, overly broad provisions can discourage investment or complicate future sales. Founders and companies should carefully consider:

  • Scope: Limit the right to key investors rather than all shareholders to avoid logistical hurdles during major sales.
  • Notice and timing: Specify clear timelines for notifying eligible shareholders and for exercising their rights to maintain efficiency.
  • Transfer mechanics: Define how shares will be allocated if total requested sales exceed the buyer’s target amount.
  • Integration with other clauses: Ensure harmony with drag-along and ROFR rights to avoid conflicting obligations.

An overly restrictive co-sale clause can hinder company flexibility, making it harder to attract buyers or finalize strategic transactions.

How Co-sale Rights Will Affect Your Company

Here's the short answer: They probably won't. Co-sale rights and ROFR are almost always a part of the extra rights that come with preferred stock, which is the stock handed out to a private company's investors. However, investors almost never use these rights. Moreover, if a company starts publicly trading, both these rights disappear.

On the other hand, if many of your investors do use their co-sale rights, you can expect a dramatic change. A new investor with a majority can throw ample weight around. That weight keeps going up if he or she gets even more shares from co-sales. If the investor gets most of your company's shares, that investor can replace all the directors, partners, managers, and other executives as much as he or she wants. Still, this is only a worst-case scenario.

Co-Sale Rights in Startup and Venture Capital Contexts

In startup financing, co-sale provisions are a standard part of investor protections in stock purchase or shareholders’ agreements. Venture capitalists often require both right of first refusal and co-sale rights to maintain influence and ensure equal exit opportunities.

When founders sell equity, co-sale rights ensure investors aren’t left behind or disadvantaged by new ownership structures. They can also serve as a check on founder behavior, discouraging premature or self-interested exits that could harm the company.

However, from a business operations perspective, co-sale rights rarely interfere with day-to-day management. They only come into play during significant liquidity events or control changes. The key is drafting the clause to balance investor protection and transaction flexibility, ensuring future capital raises or mergers remain feasible.

Frequently Asked Questions

1. What is the purpose of a co-sale agreement? A co-sale agreement protects minority shareholders by allowing them to sell their shares alongside majority shareholders, ensuring they receive the same terms in a sale.

2. How is a co-sale right different from a right of first refusal? A right of first refusal allows existing shareholders to buy offered shares before outsiders do, while a co-sale right lets them sell shares at the same time and on the same terms as the majority seller.

3. Who typically receives co-sale rights? Venture capital investors, angel investors, or key minority shareholders usually receive these rights during early financing rounds as part of their investment agreements.

4. Can co-sale rights delay a sale? Yes, if many shareholders are eligible and exercise their rights, it can delay closing timelines. That’s why well-drafted agreements specify notice periods and participation limits.

5. Do co-sale rights still apply after an IPO? No. Once a company goes public, co-sale and right of first refusal provisions generally terminate, as shares become freely tradable in the public market.

Co-sale rights normally aren't a big deal, but they will come up if you start a company and look for investors. If you need to help with your co-sale rights or other parts of equity financing, you can post your legal need on UpCounsel. The lawyers you can meet on our site include graduates of Harvard and Yale Law, and they've helped major companies such as Airbnb, Google, and Menlo Ventures.