Term sheets and priced rounds
Drag-Along, Right of First Refusal (ROFR) and Co-Sale Rights Explained
The short answer
A drag-along requires all stockholders to vote for and join a sale of the company once it has been approved by specified holders, so a small minority cannot block an acquisition. A right of first refusal (ROFR) lets the company, and then investors, buy shares a founder or employee wants to sell to a third party on the same terms. A co-sale (tag-along) right lets investors sell alongside a founder who sells to a third party. Market drag-alongs require approval by the board, the requisite preferred and usually a majority of common, and include protections such as equal treatment, capped and several liability and no forced non-competes.
Key numbers
| Term | Market position | Source |
|---|---|---|
| Drag-along approval | Board + requisite preferred + majority of common (often common held by current service providers or founders) | Venture Deals (Foundry-style baseline); NVCA practice |
| Acquirer consent level commonly sought | 85% to 90% of stockholders | Venture Deals |
| ROFR on common transfers | Company first, then major investors | NVCA ROFR and Co-Sale Agreement (updated April 2026) |
| ROFR exercise period | Typically 30 to 60 days | Practice |
| Co-sale | Applies to founder (key holder) transfers; ends at IPO or sale | NVCA practice |
| ROFR and co-sale agreement in VC deals | Near universal at Series A, often absent at seed | Acceleration |
Drag-along
Why it exists
Selling a private company usually requires the approval of the board and of a majority of the stockholders under Delaware law, but acquirers want close to 100% of holders to sign, release claims and deliver their shares. A drag-along (usually in the voting agreement) obliges every party to vote in favor, waive appraisal rights and sign the transaction documents once the specified holders approve.
Who triggers it
| Version | Approval required | Effect |
|---|---|---|
| Founder-friendly | Board + majority of preferred + majority of common (excluding common from converted preferred) | Founders and investors must both agree |
| Market | Board + requisite preferred + majority of common held by current employees or founders | Similar, with a defined common group |
| Investor-friendly | Requisite preferred alone | Investors can force a sale over founders' objection |
Protections for dragged holders
Well-drafted drag-alongs include conditions such as:
- Same form and amount of consideration per share within each class, after applying the liquidation preferences in the charter.
- Several, not joint, liability for representations and indemnities, capped at the holder's proceeds (except for its own fraud).
- Representations limited to title, authority and capacity for the dragged holder's own shares.
- No obligation to sign a non-compete or non-solicit, or to extend employment, as a condition.
- Proceeds allocated per the charter waterfall; some founders also negotiate a floor price below which common is not dragged, which investors often resist.
Acme receives a $40M acquisition offer. Preferred has $25M of 1x non-participating preferences and owns 45% as converted; founders and employees own 55%.
- Waterfall: if preferred converts it receives 45% of $40M = $18M; its preference is $25M, so it takes the $25M preference. Common receives $15M.
- Investors want the deal; founders think the company is worth more.
- Investor-friendly drag (preferred only): investors can force the sale.
- Market drag (board + preferred + majority of common): the founders' common can block, which pushes both sides to negotiate, for example a management carve-out or a higher price.
Right of first refusal (ROFR)
How it works
- A stockholder (usually a founder or employee holding common) receives an offer from a third party and must send the company a notice with the price and terms.
- The company has a period (often 30 days) to buy some or all of the shares on the same terms.
- If the company does not buy all of them, major investors may have a secondary right to buy the rest, pro rata among them.
- If nobody exercises, the seller may sell to the named buyer on the same terms within a set window; otherwise the process restarts.
The ROFR usually appears in the bylaws and in the ROFR and co-sale agreement. It keeps the cap table controlled, prevents shares from going to competitors and helps the company manage its holder count and securities compliance.
Carve-outs founders should ask for
- Estate planning transfers to trusts and family members who sign joinders.
- A de minimis allowance for founders to sell a small amount for personal liquidity, subject to board approval.
- Transfers to affiliates for entity holders.
- Company repurchases of unvested shares are outside the ROFR.
Co-sale (tag-along)
If a founder sells shares to a third party and the ROFR is not exercised, the co-sale right lets investors require that a proportional part of the sale come from their shares instead. Example: a founder agrees to sell 200,000 shares; an investor with co-sale rights holding 25% of the relevant shares can require that 50,000 of the 200,000 be its shares. Co-sale protects investors from founders exiting quietly at a good price. Founders sometimes ask for reciprocal co-sale on investor sales; investors usually refuse.
Secondary sales by founders
Founder secondary sales in later rounds are common but must go through the ROFR and co-sale process (or obtain waivers), comply with securities law (resales of restricted stock), and may affect the 409A valuation of common stock. Plan them with counsel and with the board's approval.
Founder, market and investor positions
| Clause | Founder-friendly | Market | Investor-friendly |
|---|---|---|---|
| Drag approval | Board + preferred + majority of founder common | Board + requisite preferred + majority of common held by service providers | Requisite preferred only |
| Drag protections | Equal consideration, several and capped liability, no non-compete, minimum price | Equal consideration, several and capped liability | Few protections |
| ROFR holder | Company only | Company, then major investors | Investors first |
| Founder transfers | De minimis and estate planning carve-outs | Estate planning carve-out | No carve-outs |
| Co-sale | None at seed | Major investors on founder sales | All investors, all sales |
Key takeaways
These three provisions govern liquidity: how the company is sold (drag-along) and how individual holders can sell (ROFR and co-sale). Founders should make sure a sale needs their agreement as common holders, that dragged holders receive equal treatment with capped liability, and that they keep reasonable room for estate planning and small personal sales. Investors should make sure the company can stop unwanted transfers and that they can participate when founders sell.
Frequently asked questions
What is a drag-along right?
A contractual obligation of stockholders to vote for and join a sale of the company once it is approved by specified holders, so a minority cannot block a transaction.
Who should be able to trigger a drag-along?
Market practice requires the board, the required preferred holders and a majority of common stockholders (often founders or current service providers). A drag triggered by preferred alone is investor-friendly.
What is a right of first refusal in a startup?
The company's (and often the major investors') right to buy shares a stockholder wants to sell to a third party, on the same terms, before the sale can happen.
What is the difference between ROFR and co-sale?
ROFR lets the company or investors buy the shares being sold. Co-sale lets investors sell some of their own shares in the same transaction alongside the founder.
Do ROFR and co-sale apply to employees with options?
Option holders are bound once they exercise and hold shares. The equity plan and the bylaws usually impose a company ROFR on shares issued under the plan.
Do these rights survive an IPO?
No. ROFR, co-sale and drag-along provisions typically end at an IPO or a sale of the company.