The drag-along rights prevent situations in which a minority shareholder can block the sale/acquisition of the company when it has been approved by the majority.

The first type is where the preferred stockholders drag along the common stockholders (and thus the founders as well). There is also a second type in which if an executive/founder leaves the company, her stock will be dragged along by others. In other terms, a departed founder cannot play the hold out on voting matters.

The preferred clause is to get the drag-along rights linked to following the majority of the common stock (NOT preferred). Of course, the preferred can be converted to common by investors but then it would lower the liquidation preferences (to read more on liquidation preferences, refer to posts for Day 22-24).

We also have tag-along rights for the minority shareholders. This right, not an obligation, allows them to join in any of the actions with the majority shareholder. These rights are also referred to as co-sale rights.