A co-sale agreement is a contractual provision that allows minority shareholders to sell their equity stakes when a majority shareholder or founder initiates a sale of the company. Often called "tag-along rights," this agreement ensures that smaller investors aren't locked into their positions while major stakeholders exit. When a qualifying sale event occurs, minority shareholders can participate on identical terms—same price per share, same buyer, same timing.
How It Works
Co-sale agreements are typically negotiated during fundraising rounds and documented in the company's investment agreements or shareholders' agreement. The mechanics are straightforward: if a founder holds 60% of a company and receives an acquisition offer, investors with co-sale rights can elect to sell a proportional amount of their shares to the same buyer at the same valuation. The threshold for triggering co-sale rights varies—commonly set at 30-50% of the company being sold. Without this protection, minority investors could find themselves holding illiquid stock in a company controlled by new owners.
Why It Matters for Investors
Co-sale agreements protect your exit strategy. As an angel investor, you typically hold a minority stake, making you vulnerable to unfavorable outcomes if founders negotiate their own exits. A founder might accept a lower valuation than you'd prefer, or worse, cash out entirely while you remain locked in. Co-sale rights ensure you have a voice in major transactions and aren't forced to stay invested after a change of control. This is especially critical in down rounds or distressed sales where liquidation preferences might otherwise protect earlier investors at your expense. The agreement also signals investor protection in your deal terms, which sophisticated investors view as a baseline standard.
Example
Imagine you invest $250,000 for 5% of a SaaS startup at a $5M valuation. Two years later, a strategic buyer offers to acquire the company for $50M, and the founder (holding 40%) agrees to sell. Without co-sale rights, you're stuck—perhaps the new owner wants to retain only key employees and no longer values your stake. With co-sale rights, you can force your 5% position into that same $50M deal, netting roughly $2.5M at the same terms the founder received. You exit at a fair valuation rather than negotiating separately or remaining indefinitely.
Key Takeaways
- Co-sale agreements give minority investors the right to participate in equity sales initiated by majority shareholders on identical terms
- They protect against founders exiting at valuations you wouldn't accept or leaving you as a minority holder under new management
- Threshold triggers (typically 30-50% of equity being sold) must be clearly defined in your investment documents
- Always negotiate co-sale rights as part of your term sheet to ensure meaningful investor protections