See: Co-Sale Rights.
Whatever.com raised $6 million from outside investors. One of them put in $1 million; the other put in $5 million. Microsoft wants to own a big chunk of the company. They don't want to buy it outright yet, but they'd love to own 23%, because that would entitle MSFT to a board seat (the codicles of the Board say that anyone owning over 20% of the stock gets a board seat and is able to then inspect every secret the company proffers). That $5 million investor gets MSFT to pay $30 a share for their stake, which they bought for $4 a share. But it was only those shares that MSFT signed up to buy.
Luckily for the smaller, $1 million investor, they had tag-along rights. So MSFT, if it wanted to buy 100% of the big investor's stake, had to then also buy 100% of the smaller investor's stake. Had it been a buy of, say, only 80% each, then so be it; the tag along right allows the smaller, minority investor to "tag along" under the same deal terms as the larger investor.
Big guy. Little guy.
Related or Semi-related Video
Finance: What is a term sheet?10 Views
Finance a la shmoop what is a term sheet Horny
bulls inc is a genetic laboratory specializing in making really
long horned cattle They're raising money from investors to extend
their business into goats rams sheep and especially unicorn In
fact they hope teo be one someday inside silicon valley
Joke like eight people are now laughing really hard All
right The ceo calvin mick meet awaits the terms he'll
be offered for raising his be round of capital from
investors He signals the amount he wants around ten million
box But what matters to him are the terms under
which will raise that money like one term revolves around
how much are what percentage of his count pany that
ten million buys does ten million by half the company
like was a ten million dollar four And then they
put in ten And that buys half or was it
twenty before In the ten million buys a third Or
was it forty million before In adding ten minute buys
a fifth Or was it ninety million before in the
ten million ad buys a tenth Yeah well obviously he
wants to keep a cz much of the companies he
can for himself and for the other investors and for
the employees who have a you know a stake in
it Tight We'll stop doing that So one term is
the valuation Another term on the term sheet is the
type of stock that the investor wants to buy for
the ten million bucks she's probably putting in Is it
common stock Is it preferred stock Is it special convertible
preferred stock that carries a liquidity preference such that be
round investors might get like three times their money back
before everyone else gets a dime Yeah it's a another
set of terms Got it Alright Next term Is there
a board seat that comes with this investment Like the
people who are investing in this be round Do they
get a guaranteed board seat No matter how many shares
they own or what percentage of the company they own
that kind of thing Alright next term how big is
the option Cool to attract proven talent from the genetic
modification industry Like you gotta spend a lot of options
to get someone to leave genentech to come to a
risky little start up like this right Alright next term
Does the founder of the company get any special rights
or is he just a common shareholder like all the
other employees like does he have a guaranteed title or
a guaranteed job or some guaranteed hey out or or
some guaranteed set of steak knives or some like that
All right well lots more terms might be included in
this term sheet that he'll evaluate All right we didn't
stop did we And term sheets don't exist on ly
For investors buying stakes in companies they exist for basic
business deals as well so pretty simple But if you
can go back and watch this video again so that 00:02:46.66 --> [endTime] you're not utterly confused Oh my
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