Reading: Protection and Participation

Most term sheets also include a co-sale right for the investors (also known as Tag-Along Rights or Take-me-Along Rights). With a co-sale right, the investors have the right to participate pro rata (based on the amount of securities held) at the same terms if a founder wants so sell shares.

In the above example, we have assumed that an external investor is willing to buy 100'000 shares at a price of $20 from the founder. Suppose that that neither the company nor any of the investors exercise their right of first refusal. Instead, let's assume that two of the investors also want to sell shares and that the founder and these two shareholders hold the following amount of securities:

• Founder: 1 million shares
• Investor A: 500'000 shares
• Investor B: 500'000 shares.

Consequently, the founder accounts for 50% of the selling shareholders and investors A and B each account for 25%. 

With the co-sale right, investors A and B can force the founder to take them along on the deal so that the external investor will buy up to 25'000 shares from each of them and only the remaining  50'000 shares from the founder.

Together, the right of first refusal and the co-sale right make sure that the investor can participate in attractive future stock deals if he chooses to do so:

• Use the right of first refusal to buy shares if the deal terms are attractive
• Use the co-sale right to sell shares if the deal terms are attractive

The third set of rights, the preemptive rights, have the exact same purpose.