A Drag-Along provision gives Investors the right to force stockholders to vote in favor of a sale, merger, or other Deemed Liquidation Event approved by a majority of Preferred Stockholders (the “Requisite Holders”). This provision prevents minority stockholders from blocking transactions approved by a majority of stockholders.
Investors consider this provision a protective feature, especially where they may look to sell for less than their liquidation preference. But the Company can limit the power of this provision by requiring Board approval and/or a majority of Common Stock vote in addition to the Preferred Stock vote.
Term Sheet Language: Holders of Preferred Stock and all current and future holders of greater than [1]% of Common Stock (assuming conversion of Preferred Stock and whether then held or subject to the exercise of options) shall be required to enter into an agreement with the Investors that provides that such stockholders will vote their shares in favor of a Deemed Liquidation Event or transaction in which 50% or more of the voting power of the Company is transferred and which is approved by [the Board of Directors] the Requisite Holders [and holders of a majority of the shares of Common Stock then held by employees of the Company (collectively with the Requisite Holders, the “Electing Holders”), so long as the liability of each stockholder in such transaction is several (and not joint) and does not exceed the stockholder’s pro rata portion of any claim and the consideration to be paid to the stockholders in such transaction will be allocated as if the consideration were the proceeds to be distributed to the Company’s stockholders in a liquidation under the Company’s then-current Charter, subject to customary limitations.]