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The Flawed Terms in VC Deals

• lucumo 17y ago
  For those that don't know what a drag along clause is: http://www.investorwords.com/6495/drag_along_right.html http://www.investorwords.com/6495/drag_along_right.html
  • mattm 17y ago
    "A right that allows majority shareholders to force minority shareholders to accept an agreement" I don't understand. Wouldn't the majority be able to force a decision regardless of whether they have this clause or not?
    • fatdog789 17y ago
      It's generally applied where a 2/3/supermajority would normally be required for approval of organization-altering decisions -- a drag along allows a simple majority to force approval. The concept is taken from partnership law, where dissolution can be forced upon all partners even if only a handful of partners vote for it -- the partnership assets are liquidated and the proceeds distributed. A drag along basically forces the organization to liquidate if the majority shareholders want to -- and prevents the minority shareholders from taking any steps to challenge it. Drag along provisions are generally unenforceable in America if they prevent the minority shareholders from filing court action to challenge the transaction, or otherwise prevent minority shareholders from exercising rights under the law or under the contract which are not expressly waived in the language of the drag-along provision itself.
• sgrove 17y ago
  Interesting read, but I would have liked to hear more about which terms are generally put in as boilerplate, and which the VC will most often invoke in order to manipulate situations they don't care for. Also, hearing that the original founders make for the best exit is very interesting indeed, obvious as it may seem. I'm very curious about how he defines "best exits"...