Some term sheets contain a drag along provision, requiring all of the company's shareholders (both founders and investors) to agree to a merger or acquisition approved by a certain percentage of the investors. Many drag along provisions also require the company to try to sell itself if a certain number of investors make a request.

Your first reaction might be "wait, the investors can make me sell my company even if I don't want to?" If you agree to a drag along provision, the answer is probably yes.

But drag-along provisions aren't all bad. They prevent minority shareholders (whether founders or investors) from holding up a transaction that the other shareholders want,

The key is to make sure that there are reasonable limits on the investors' ability to force a sale. A few tactics for doing so:

Require Approval by Common Stock. Many acquirers won't agree to a deal where the preferred shareholders want to go forward but the common shareholders - i.e., the founders - don't. There is too much risk of shareholders trying to hold up the transaction or suing the company if a large percentage are forced into a deal. So, it's sometimes possible to negotiate a drag-along provision requiring approval of the majority of common shareholders. Point out that, realistically, the common are going to have to be in on the deal anyway. And, if the investors really want the transaction to go forward, and the common won't approve, they can always convert to common stock and vote in favor of the transaction.

Insist on Board Approval. Many drag-along provisions will require the Company's board to approve the transaction in addition to the required percentage of the investors. This prevents a "hostile transaction" scenario, where a deal is presented to shareholders and bypasses the board. If you have a board approval provision, as long as you haven't given up board control, the founders can still block a transaction.

Require Greater Approval. Sometimes drag-along provisions require more than a majority of the preferred. Most potential acquirers will want much greater shareholder approval anyway, in order to prevent potential lawsuits by minority shareholders. So, the company can request that the drag along require approval of a greater percentage of the preferred, and justify it with the standard requirements of potential acquirers - i.e., "it's not us, it's them."

Set a Holding Period Before a Forced Sale. If investors insist on the ability to require the company to try to sell itself, the company should only allow a demand after a certain period of time has passed since the financing. This gives the company some runway to try to maximize value before investors can force a sale.