Is a drag-along clause bad for founders?

It's founder-neutral by design in most cases, since it typically only activates once the majority shareholder, often the founders together with the lead investor, has already agreed to sell on specific terms. It becomes more consequential the smaller a founder's post-round stake is.

What's the difference between participating and non-participating liquidation preference?

Non-participating means the investor picks whichever is higher: their preference amount, or their as-converted pro-rata share. Just one of the two. Participating means they get the preference amount plus a pro-rata share of what's left, which is materially more founder-adverse.

What's the least founder-adverse form of anti-dilution?

Broad-based weighted-average. It adjusts for a down-round proportionately to the company's overall capitalization. Full-ratchet, by contrast, repriced the investor's entire earlier stake to the new lower price regardless of the down-round's size.

Does BuildWright draft or negotiate my Shareholders' Agreement?

Not as a standalone service today. This article explains the clauses that show up in an SHA so you understand what you're looking at. Founders approaching a funding round should talk to us directly about what documentation support looks like at that stage.

Shareholders' Agreement Clauses Every Founder Should Understand Before a Funding Round

Buildwright Team26 July 20263 min read

shashareholders-agreementdrag-alongtag-alongliquidation-preferenceanti-dilution

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A term sheet arrives, and somewhere in the following weeks a Shareholders' Agreement shows up alongside it, usually drafted first by the investor's counsel. By that point it's too late to be reading about drag-along rights for the first time. This is the clause-by-clause layer on top of what an SHA is and how it differs from your Founders' Agreement, which we've already covered in full.

This article assumes you already know how an SHA differs from a Founders' Agreement and an LLP Agreement. For that comparison, filed-with-MCA status, who signs, and when, see our full breakdown.

Where an SHA fits versus your Founders' Agreement

In short: a Founders' Agreement covers only the founders, usually signed early, before there's anything to fight over. An SHA covers every shareholder, including investors, and typically shows up at your first priced funding round. The full comparison, including where each one is filed and what binds the company, is in Founders' Agreement vs SHA vs LLP Agreement. What follows here is the clause content specific to an SHA that the comparison article doesn't get into.

Drag-along: the exit-forcing clause

A drag-along right lets a majority or investor shareholder who has agreed to sell compel the minority shareholders, typically the founders, to sell on the same terms. It's a standard investor-side protection, and its purpose is to enable a clean 100% exit rather than leaving an acquirer to negotiate separately with holdouts who could block the deal.

Tag-along: the exit-protecting clause

Tag-along is the mirror right. If the majority shareholder sells, minority shareholders can require the buyer to purchase their shares too, on the same terms. It exists to stop minority holders being left behind, holding shares in a company under new, unknown ownership, with no exit of their own.

Liquidation preference: participating vs non-participating

On a liquidation event, a sale, wind-down, or similar exit, investors holding preference shares get paid out ahead of ordinary equity holders, meaning the founders. That's the liquidation preference. The version that matters most is whether it's participating or non-participating.

This article is general information, not legal advice. If you need advice for your specific situation, contact Buildwright directly.

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Type	What the investor gets
Non-participating preference	Either the preference amount, or their pro-rata share of the proceeds as if converted to ordinary equity, whichever is higher. Not both.
Participating preference	The preference amount, plus a pro-rata share of whatever remains, sometimes called a "double-dip." Materially more founder-adverse than the non-participating version.

Shareholders' Agreement Clauses Every Founder Should Understand Before a Funding Round

Where an SHA fits versus your Founders' Agreement

Drag-along: the exit-forcing clause

Tag-along: the exit-protecting clause

Liquidation preference: participating vs non-participating

Anti-dilution: broad-based weighted-average vs full-ratchet

What to actually negotiate versus what to just understand