What are some effective ways to negotiate a better drag-along provision for your VC firm?

1 Define the triggering threshold

The first step to negotiate a better drag-along provision is to define the triggering threshold, which is the minimum percentage of shares or voting rights that the majority shareholders need to initiate a drag-along. The lower the threshold, the more control the VCs have over the exit process, but the higher the risk of alienating the founders and other investors. The higher the threshold, the more consensus the VCs need to obtain from other shareholders, but the lower the chance of litigation or backlash. A common range for the triggering threshold is 50% to 75%, depending on the stage, valuation, and cap table of the company.

2 Specify the approval mechanism

The second step to negotiate a better drag-along provision is to specify the approval mechanism, which is the method by which the majority shareholders inform and obtain consent from the minority shareholders to join a sale. The approval mechanism should be clear, transparent, and fair, and avoid any ambiguity or coercion. For example, the approval mechanism could require a written notice, a reasonable time period, a minimum price per share, and a pro rata allocation of proceeds. The approval mechanism should also address any dissenting rights, waiver rights, or indemnification obligations of the minority shareholders.

4 Consider the buyer's perspective

The fourth step to negotiate a better drag-along provision is to consider the buyer's perspective, which is often overlooked by the VCs. The buyer may have different preferences, expectations, and requirements for the drag-along provision, depending on their strategic objectives, due diligence findings, and risk appetite. For example, the buyer may want a higher triggering threshold, a simpler approval mechanism, or a broader indemnification scope. The VCs should anticipate and address these potential issues in advance, and communicate with the buyer effectively to align their interests and facilitate a smooth transaction.

5 Leverage your reputation and relationship

The fifth step to negotiate a better drag-along provision is to leverage your reputation and relationship, which are intangible but valuable assets for the VCs. The VCs should demonstrate their credibility, expertise, and track record in the venture capital industry, and highlight their value-added contributions to the portfolio company. The VCs should also maintain a positive and respectful relationship with the founders, other investors, and the buyer, and avoid any conflicts or mistrust. The VCs should use their reputation and relationship as a source of influence and persuasion, and seek a win-win outcome for all parties involved.

6 Review and update the drag-along provision regularly

The sixth step to negotiate a better drag-along provision is to review and update the drag-along provision regularly, which is often neglected by the VCs. The drag-along provision is not a static or one-time agreement, but a dynamic and evolving one, that should reflect the changing circumstances and expectations of the company and the shareholders. The VCs should monitor the market conditions, the company performance, and the shareholder composition, and propose any necessary adjustments or amendments to the drag-along provision. The VCs should also ensure that the drag-along provision is consistent and compatible with other contractual documents, such as the articles of association, the term sheet, and the share purchase agreement.