The Drag Along

Photo by Anna Samoylova on Unsplash
  1. I can’t state this enough: Remember that your investor has to exit, so don’t try to negotiate the deletion of this clause. This is a deal breaker for most serious VCs. If we don’t have a legal protection against founders that don’t want to sell, we are blocking our most important action: the exit. If you don’t want to sell, venture capital might not be for you. There are other sources of capital out there.
  2. Understand your investor’s situation. How many years are they into the fund? How many years do they still have left? What % of the fund are they committing to your company? These details will allow you to better understand their intentions and motivations and allow you to better negotiate the details of the drag.
  3. Negotiate time. For example, “DILA can’t drag during the first 18 months”.
  4. Negotiate percentages. For example, “DILA cannot drag us alone, you must have 75% of the preferred shares on board in order to drag”. Remember that who has the right is more important than the right itself.
  5. Try to get the Drag-along to pertain to following the majority of the common stock, not the preferred.
  6. Remember that VCs are looking for homeruns. We are not in this business to cap our downside: we are in it to maximize our upside. So don’t be afraid of us “selling your company cheap”. We are not looking to do quick flips. Do not over-complicate it with caps or valuations mechanisms that hinder the upside of all the shareholders, including your own.

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Alejandro Diez Barroso. General Partner @ DILA Capital, a venture capital firm focused on Latin American and Hispanic startups.

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a Mexican VC

Alejandro Diez Barroso. General Partner @ DILA Capital, a venture capital firm focused on Latin American and Hispanic startups.