What is the meaning of:
Employers sometimes offer certain of their employees ownership interests in the company. This is often a once-in-a-lifetime opportunity to acquire financial security and, so, is a strong inducement to an employee accept a position, or to remain in a position.
However, what happens if the employer later wants to sell the company, or merge it with another company? Can the employee try to prevent that from taking place by, for example, banding together with other employee-shareholders? Yes – unless the employee has signed an agreement not to do so, commonly referred to as a grant of “Drag-Along Rights.”
Just like they sound, “Drag-Along Rights” permit the employer to “drag the employee along” with the other owners into a new business organization, on the same financial terms and legal conditions as they are “going.”
In this way, an employer can give up some of its ownership in a company, but none of the control of its destiny.
Are “Drag-Along Rights” a problem for employees who are becoming owners? No, not really, but it is always a good idea to understand what it is you may be signing away.
If you are offered units in a limited liability company you work for, or shares of a corporation you work for, look for “Drag-Along Rights” in the fine print. Chances are that is where you will find them, “lurking.”
© 2016 Alan L. Sklover. All Rights Reserved. Commercial Use Strictly Prohibited