On June 17, 2025, the U.S. Senate passed the Guiding and Establishing National Innovation for U.S. Stablecoins Act—better known as the GENIUS Act—marking a watershed moment in the legal treatment of digital assets. With strong bipartisan support, the bill lays the foundation for the first comprehensive federal regulatory regime governing the issuance and operation of payment stablecoins.

At its core, the GENIUS Act answers a long-standing question: who may issue a dollar-backed digital asset, and under what conditions? Until now, U.S. law offered no uniform framework for stablecoins, despite their rapid growth into a multi-billion-dollar market and increasing relevance in global payments. This regulatory gap raised concerns about consumer protection, systemic risk, and financial integrity.

The new legislation seeks to close that gap by establishing clear federal and state pathways for entities wishing to issue “payment stablecoins“—digital assets pegged to fiat currency and used primarily for transactions. It restricts issuance to licensed banks or newly designated “qualified issuers” that meet stringent requirements for asset backing, transparency, AML compliance, and redemption rights. It also provides a process for state-level oversight if the state regime meets federal standards.

The Act has significant implications not only for crypto-native companies, but also for banks, fintech firms, and multinational platforms exploring tokenized payments. Additionally, it clarifies legal boundaries, introduces criminal and civil penalties for violations, and—perhaps most importantly—creates a federal mechanism for certifying stablecoin regimes and overseeing issuers.

This article breaks down the GENIUS Act’s key provisions, the legal structures it creates, and the strategic considerations for issuers, platforms, and regulators going forward.

On May 28, 2025, the U.S. Securities and Exchange Commission (SEC) released new data and analysis that shine a light on how private markets are evolving—especially in three key areas that affect both investors and companies looking to raise money.

The goal of this release was to give the public, regulators, and market participants a better understanding of how capital is being raised outside of traditional public markets, and what kinds of risks or patterns are emerging. The SEC’s analysis is based on filings made by investment advisers, private funds, and companies that have used special exemptions from public registration rules to raise money.
The release covers three distinct topics.

First, it looks at hedge funds—specifically at who owns them and how concentrated that ownership is. The SEC defines “concentration” as a situation where just five investors hold more than 70% of a fund’s equity. This matters because if too few investors hold too much power, it could affect how the fund operates, how risky it is, and how it responds to market changes.

Second, the SEC reviews a decade of activity under Regulation A, a type of legal exemption that allows companies—usually small or early-stage ones—to raise money from the public without going through the full process of an IPO. The analysis shows trends in how this tool has been used, who uses it, and how much capital has actually been raised compared to what companies originally sought.

Third, the report focuses on Regulation Crowdfunding, another exemption created under the JOBS Act that lets small businesses raise money directly from the public through online platforms. This part of the data examines how the market has grown, how much funding companies have raised, and what kinds of businesses are using this exemption.

Together, these areas provide a snapshot of how private capital formation is changing—what’s working, what isn’t, and where risks might be building. The legal insights from this release point to the growing complexity of private markets and the need for smart regulation that balances investor protection with access to capital.

When a company wants to raise money by selling shares or bonds, it usually has to “register” that sale with the U.S. Securities and Exchange Commission (SEC). But sometimes companies don’t go through this public registration process. Instead, they rely on certain legal exceptions that let them sell these investments privately—these are called unregistered offerings.

The legal foundation for these private sales comes from the Securities Act of 1933, which normally requires registration unless the sale falls under a specific exemption—such as Section 4(a)(2) or Regulation D.

Here are the main types of unregistered offerings:

• Rule 144A offerings. These are large sales of securities, typically made to big financial institutions (called “qualified institutional buyers” or QIBs). The company sells the securities to a bank or other middleman, who immediately resells them to those institutions. This is a fast and efficient way to raise large amounts of money without registering the securities.
• Regulation S offerings. These allow companies to sell securities outside the U.S. without registering with the SEC, as long as the sales follow certain rules. When combined with Rule 144A, these are called 144A/Reg S offerings, where U.S. institutions get the 144A side and non-U.S. investors get the Reg S side.
• Traditional private placements. This means selling directly to a small group of investors, often wealthy individuals or institutions. These can be done under:
  • Rule 504 (small offerings up to $10 million),
  • Rule 506(b) (no advertising, but allows up to 35 non-accredited investors),
  • Rule 506(c) (you can advertise, but only sell to verified accredited investors).
• Medium-Term Notes (MTNs) and Commercial Paper. These are short- or medium-term loans raised by companies from institutional investors, often done continuously over time without registration.
• PIPE transactions (Private Investment in Public Equity). These are special deals where public companies privately sell stock at a discount to raise quick capital, usually with a promise to register the shares later.

What’s not included?

This overview doesn’t cover:

• Regulation A+ offerings (a hybrid between public and private),
• Crowdfunding, or
• Startup fundraising rounds like seed or angel investments.

Private offerings are faster and cheaper than public offerings, but they still have to follow the law. The SEC sets rules to prevent fraud and protect investors—even in private deals. Companies must also keep up with new regulations and legal updates, such as changes to the definition of “accredited investor” or what qualifies as general solicitation.

So, while unregistered offerings skip some steps, they’re still a tightly regulated and structured way for companies to raise money from select investors without going fully public.

A term sheet is a simple document that outlines the basic terms of a deal before the full contract is written. It’s like a roadmap that helps both sides see if they’re on the same page before spending time and money on detailed negotiations and legal work.

People often call it a Letter of Intent (LOI) or a Memorandum of Understanding (MOU)—these are just different names for the same idea: putting the main deal points in writing early on.

The goal of a term sheet is to show that both sides are serious about the deal and agree on the big-picture terms. Most of the time, a term sheet isn’t legally binding, which means either side can still walk away. But sometimes, it includes a few binding promises—like keeping the deal confidential or not negotiating with anyone else for a certain period.

Term sheets are most common in private business deals, like buying or merging companies (M&A), starting joint ventures, or raising private investment money. They’re usually not used in public deals because that might require public disclosure before the parties are ready.

Going public, whether for a budding startup or an established company seeking to expand its horizons, is a momentous milestone in the life cycle of any business. But going public on a multi-tiered exchange like the NYSE or Nasdaq is more than just a celebration. It requires precision in complying with complex technical, legal, and corporate governance criteria outlined by the Securities and Exchange Commission (SEC). This article outlines the listing requirements and processes leading up to a public offering that is marketed differently for subsequent sales for both domestic and foreign companies.

I.  Primary Listing Requirements on Major U.S. Exchanges

If a company wants to list its shares on a U.S. stock exchange—like the NYSE or Nasdaq—to access public investors and trade in the open market, it needs to clear two big hurdles:

1. Register with the SEC. This is the U.S. government’s securities watchdog. The company has to file a detailed registration statement that discloses everything investors need to know: financials, risks, business model, and more. This process is designed to protect investors and make sure the market has accurate, up-to-date information.
2. Get Accepted by the Exchange. Each stock exchange sets its own minimum standards to decide whether a company is eligible to list. These standards are meant to filter for size, stability, and market interest.

NYSE Listing Requirements

The NYSE (New York Stock Exchange) sets slightly different rules for U.S. companies and foreign companies.

For U.S. Companies

The company must show it has a strong base of investors and some meaningful financial size:

• At least 400 U.S. shareholders, each holding 100+ shares
• At least 1.1 million shares held by the public (i.e., not insiders or controlling shareholders)
• Those shares must have a market value of at least $40 million
• The stock price must be at least $4 per share
• Financially, the company must pass one of two tests:
  • Earnings test (based on recent profits), or
  • Global market capitalization test (based on total company value)

For Non-U.S. Companies (Foreign Private Issuers or FPIs)

The NYSE adjusts its criteria to account for global shareholder bases:

• 5,000 shareholders worldwide, each holding 100+ shares
• 2.5 million shares publicly held worldwide
• Market value of those shares must be at least $100 million (or $60 million in some special cases)
• Must meet one of four financial standards, each tailored to different business types (e.g., earnings-based, valuation-based, or based on affiliation with another NYSE-listed company)

Direct Listings on NYSE

A company can also go public without an IPO—this is called a direct listing. To do this, the company must:

• Sell at least $100 million of its own shares in the opening auction on the first trading day, or
• Show that the combined value of the shares it plans to sell and the ones already held by the public totals at least $250 million

Nasdaq Listing Requirements

Nasdaq has three separate market tiers—each with its own standards. From most to least rigorous:

1. Global Select Market – for large, established companies.
2. Global Market – for mid-sized companies.
3. Capital Market – for smaller or growth-stage companies.

Each tier has a slightly different mix of requirements, but all focus on the same key areas:

• Public float (number and value of shares held by public investors).
• Number of shareholders, usually 300–450 minimum.
• Minimum share price, typically $4 per share.
• Financial strength, measured through income, revenue, assets, or equity.
• Trading history, especially for companies that were previously private or traded over-the-counter.

Direct Listings on Nasdaq

Nasdaq allows direct listings too—but only on its Global Select tier. To qualify, a company must:

• Have at least $110 million in market value of freely tradable shares (or $100 million if it has $110 million in stockholders’ equity).

II.  What Are Qualitative Listing Standards?

When a company wants to be listed on a major U.S. stock exchange, it’s not enough to meet certain financial benchmarks mentioned above. The company also has to prove that it has the right internal structures in place to be publicly accountable. This is what called qualitative listing standards.

These standards focus on how a company is governed: who’s overseeing it, how transparently it communicates with investors, and whether its leadership is subject to independent oversight.

Corporate Governance: Independence and Oversight

One of the first things the exchanges look at is whether a company has a board of directors that is not dominated by insiders. Most of the board should be independent—meaning the individuals have no meaningful ties to the company or its executives that could cloud their judgment.

Two committees must always be composed entirely of independent directors:

• An audit committee, which oversees the accuracy of the company’s financial reporting and liaises with external auditors.
• A compensation committee, which sets executive pay and ensures that it’s tied to performance, not favoritism or personal ties.

These committees play a real role in guarding against fraud, excessive risk-taking, and conflicts of interest.

In the case of the NYSE, there’s a third required committee focused on nominations and governance, also made up entirely of independent directors. Nasdaq offers more flexibility on this point, allowing companies to assign these responsibilities to a group of independent directors even without a formal committee.

Another important governance feature is the requirement that independent directors regularly meet without management present. These private meetings—sometimes called executive sessions—give the board a chance to candidly evaluate company leadership and raise concerns, if needed, without pressure.

Ongoing Disclosure: Keeping Investors Informed

Once a company is listed, it has to keep the public informed—not just once a year, but continuously. This means publishing annual reports and interim (typically quarterly) financial statements that comply with both SEC rules and stock exchange standards.

In addition to these regular reports, companies are expected to immediately disclose major developments that could affect their stock price—things like mergers, executive departures, investigations, or big shifts in strategy. These updates typically come through filings like Form 8-K, and they’re a critical part of how markets function fairly.

Companies are also required to adopt a Code of Conduct or Code of Ethics that outlines expectations for ethical behavior, legal compliance, and integrity in financial reporting. This code must apply to directors, officers, and employees, and must be disclosed to investors.

What About Foreign Companies?

The U.S. stock markets are global, and many companies that list on the NYSE or Nasdaq are based overseas. These foreign private issuers (FPIs) are allowed some flexibility in how they meet governance standards.

Rather than forcing them to fully adopt U.S. governance rules, the exchanges let FPIs follow the corporate governance practices of their home countries—if they clearly explain to investors how those practices differ from U.S. standards.

So, for example, if a European company doesn’t have a separate compensation committee (because its local laws don’t require one), it can still list in the U.S.—as long as it discloses that difference and explains how compensation decisions are made instead.

III.  Secondary Listings and Follow-On Offerings in the U.S. Markets

Once a company completes its initial public offering (IPO), its journey as a public company is just beginning. Over time, it may need to raise additional capital to fund growth, refinance debt, or pursue strategic opportunities. This is where follow-on offerings—sometimes called secondary offerings—come into play. These offerings involve the public sale of shares after the IPO and are governed by a well-established regulatory framework in the U.S. overseen by the SEC.

What Are Follow-On Offerings?

A follow-on offering is a way for a company to return to the public markets and sell shares after its initial listing. These offerings can involve:

• Primary shares, which are newly issued by the company to raise fresh capital.
• Secondary shares, which are sold by existing shareholders (such as early investors, founders, or insiders) who are liquidating part of their holdings.
• Or a combination of both.

Follow-on offerings can be large and high-profile (as with major tech companies raising billions post-IPO) or more modest, depending on the company’s capital needs and market appetite.

While often associated with U.S. domestic companies, foreign private issuers also use this route to expand their investor base or fund U.S.-based operations—typically after completing a primary listing via American Depositary Receipts (ADRs) or direct share offerings.

Key SEC Forms: Form S-1 vs. Form S-3

To conduct a follow-on offering, a company must file a registration statement with the SEC. This ensures that investors have access to current, accurate, and complete information about the company and the securities being offered.

There are two main types of forms used for this purpose:

1. Form S-1 is the full-length registration statement used for IPOs and for follow-on offerings by companies that do not yet qualify to use the shorter Form S-3. It requires extensive disclosures, including detailed financial statements, risk factors, management discussion and analysis, executive compensation, and business operations—following Regulation S-K Form S-1 is also the default form for companies making their first foray into the U.S. public markets, and for younger or smaller public companies that haven’t yet built a filing track record with the SEC.

2. Form S-3 is a short-form registration that allows companies to streamline the process by incorporating by reference previously filed SEC reports (like 10-Ks, 10-Qs, and 8-Ks), rather than repeating information already made public. This makes Form S-3 faster and more efficient for follow-on offerings. Even better, it can be used as a “shelf registration”, meaning the company can register a large block of securities once and then issue them incrementally over time—taking advantage of favorable market conditions without having to re-file each time.

Who Can Use Form S-3?

The SEC imposes specific criteria to ensure that only established, compliant companies use this streamlined form. To qualify:

1. The company must be a U.S. domestic issuer (foreign private issuers must use Form F-3 instead).
2. It must have a class of securities already registered under the Exchange Act (typically as a result of an IPO or direct listing).
3. It must have filed all required SEC reports on time for the previous 12 months—this shows a track record of compliance.
4. It must have no defaults on material debt or long-term leases.
5. It must not have missed any dividend payments on preferred stock since its most recent fiscal year.

Finally, the company’s public float—the market value of its publicly traded shares held by non-affiliates—determines how much it can raise using Form S-3:

• If the float is $75 million or more, the company can generally use Form S-3 to register any size offering of equity or debt.
• If the float is below $75 million, the company can still use Form S-3 for limited offerings, but only under specific conditions:
  • For secondary offerings (i.e., by existing shareholders), there are fewer restrictions.
  • For primary offerings (i.e., by the company), they must relate to non-convertible securities and the company must meet one of several alternative criteria—such as having issued $1 billion in debt over the past three years, or being a wholly-owned subsidiary of a well-known seasoned issuer.

IV.  Domestic vs. Foreign Companies: How Listing in the U.S. Works

Going public on a U.S. stock exchange is a major step for any company. Whether the goal is to access deep pools of capital, raise the company’s global profile, or provide liquidity for early investors, listing in the U.S. comes with both prestige and regulatory obligations. But the path to listing depends in part on where the company is based.

While the core process is similar for all companies, U.S. domestic issuers and foreign private issuers (FPIs) often take slightly different routes—especially when it comes to disclosure formats and share structures.

The Primary Listing Process

At the most basic level, a company must register its securities with the SEC before they can be publicly traded on a U.S. exchange. This process involves filing a registration statement—a legal and financial disclosure package that lays out everything investors need to know.

The registration statement consists of two parts:

• A prospectus, which is the formal document provided to investors that describes the company’s business, financial performance, risks, and use of proceeds.
• A set of exhibits, which includes additional legal, financial, and organizational documents filed with the SEC but not necessarily shared with the public in marketing materials.

Once submitted, the SEC reviews the filing and provides comments. The company responds, and once the SEC is satisfied, it declares the registration effective. Only then can the shares be sold or listed for trading.

Importantly, a listing doesn’t always require a public offering. A company can go public through a direct listing, where no new capital is raised. Instead, existing shareholders are simply allowed to sell their shares on the open market. Direct listings have become more common in recent years—especially for high-profile tech companies—and are now permitted on both the NYSE and Nasdaq under certain conditions.

Foreign Companies

For companies based outside the U.S., the listing process follows the same basic legal and regulatory structure—but with some important differences designed to accommodate international practices.

Foreign Private Issuers (FPIs)—a category under U.S. securities law that includes non-U.S. companies with limited U.S. shareholder or management presence—can list either their actual shares or American Depositary Receipts (ADRs). The choice between the two depends on a mix of regulatory, strategic, and market considerations.

An ADR is essentially a proxy for a foreign share. It’s a negotiable certificate issued by a U.S. bank, representing one or more shares of the foreign company. These certificates are traded just like U.S. stocks and offer U.S. investors a convenient way to invest in foreign companies without dealing with foreign exchanges, currencies, or settlement systems.

ADRs are often favored by FPIs because they:

• Simplify cross-border trading logistics.
• May be more familiar to U.S. retail and institutional investors.
• Can enhance visibility in the U.S. without requiring full corporate restructuring or duplicative financial reporting.

On the other hand, direct listings of foreign shares (without ADRs) are sometimes used when the issuer wants tighter integration with its global shareholder base or is already well-known among U.S. investors.

The decision to use ADRs versus direct shares typically comes down to cost, complexity, investor perception, and the company’s long-term capital markets strategy.

Secondary Listings: Follow-On Options for FPIs

Just like U.S. companies, foreign issuers that have already gone public may later decide to raise more capital or allow insiders to sell—through what’s known as a follow-on offering.

In these cases, the company generally files a Form F-1, which is the foreign counterpart to the Form S-1 used by domestic issuers. It’s a full disclosure document that includes detailed financials, risk factors, business operations, and governance practices, all in compliance with U.S. regulations.

The FPI may again choose to structure the offering using ADRs or its underlying ordinary shares, depending on which structure it used for its primary listing and what best suits the strategy for the secondary raise.

Imagine you and a group of friends start a company together. Over time, you bring in outside investors to help grow the business. These investors provide the funding you need, but in return, they get a say in how the company is run. Now, fast forward a few years. The company has grown, and a big corporation offers to buy it for a significant amount of money. Everyone is excited, but there’s a problem: one of your original co-founders doesn’t want to sell. They believe the company has more potential and want to hold out for a better deal. What happens now? This is where a drag-along agreement comes into play.

A drag-along agreement is a legal provision that allows majority shareholders to force minority shareholders to join in the sale of a company. In simpler terms, if the majority of shareholders agree to sell the company, the minority shareholders are legally obligated to go along with the decision, even if they personally disagree. This might sound harsh, but it serves an important purpose. It ensures that a small group of shareholders can not block a deal that benefits the majority and the company as a whole.

In the world of startups and venture capital, drag-along agreements are especially important. Startups often have multiple classes of shareholders, such as founders, employees with stock options, and outside investors who hold preferred stock. Each group might have different priorities. For example, founders might be emotionally attached to the company and want to keep growing it, while investors might be looking for a quick return on their investment. A drag-along agreement helps align these interests by making clear everyone is on the same page when it comes to major decisions like selling the company.

Let’s go back to our example. Suppose your company has three co-founders: you, Sarah, and Mike. You also have a venture capital firm, TechInvest, as a major investor. TechInvest owns 60% of the company, while you, Sarah, and Mike each own 10%, and the remaining 10% is split among employees. If TechInvest decides to sell the company, they can use the drag-along agreement to force you, Sarah, Mike, and the employees to agree to the sale, even if some of you would prefer not to.

Types of Drag-Along Agreements 

Drag-along agreements come in different forms, each designed to address specific situations that can arise in the life of a company. Let’s break down the two main types.

First Flavor: Preferred Investors Dragging Common Shareholders

In many startups, investors like TechInvest hold preferred stock, which often comes with special rights and privileges. One of these rights is the ability to drag along common shareholders—typically the founders and employees—when it comes to selling the company. Here’s how it works: if TechInvest, as the majority preferred shareholder, decides to sell the company, they can force you, Sarah, Mike, and the employees to agree to the sale, even if some of you would rather not.

This type of drag-along agreement is especially common in venture capital deals. It’s designed to prevent a small group of common shareholders from blocking a deal that the majority of investors believe is in the company’s best interest. For example, if TechInvest negotiates a $50 million acquisition offer, they do not want one co-founder holding out and demanding $60 million, potentially scuttling the deal. The drag-along agreement helps that everyone moves forward together.

The language in these agreements is usually straightforward. It might say something like: “If a majority of the preferred shareholders approve a sale of the Company, all holders of common stock shall be required to consent to the transaction and shall have no right to object, challenge, or otherwise impede the sale.”  This gives the preferred investors the power to make decisions without being held hostage by minority stakeholders.

Historically, this type of drag-along agreement became more common after the early 2000s dot-com bubble burst. During that time, many startups were sold for less than their investors had hoped, and founders often resisted these sales because they wouldn’t receive any proceeds after the investors’ liquidation preferences were paid out. To avoid these conflicts, investors began insisting on drag-along provisions to push they could exit their investments when needed.

Second Flavor: Dragging Along Departed Founders

The second type of drag-along agreement deals with a different but equally tricky situation: what happens when a founder leaves the company but still owns shares? Let’s say Mike, one of your co-founders, decides to leave the startup after a disagreement. He still owns 10% of the company, and now he’s no longer involved in day-to-day operations. If the company later decides to sell, Mike might refuse to agree out of spite or because he has different ideas about the company’s future. This could create a major roadblock.

To prevent this, many companies include a drag-along provision specifically for departed founders. Under this agreement, if Mike leaves the company, his shares are automatically “dragged along” with the majority in any sale or major decision. In other words, Mike no longer has the power to block a deal. Instead, his shares are voted in proportion to how the other shareholders vote. For example, if 90% of the shareholders vote in favor of a sale, Mike’s shares will be counted as 90% in favor and 10% against, even if he personally disagrees.

The language for this type of agreement might look like this: “Upon the departure of any shareholder who was an original signatory to this agreement and held common stock at the time of its execution (a ‘Departing Shareholder’), all shares held by such Departing Shareholder, including common stock or any preferred stock acquired through conversion, shall be subject to a drag-along provision whereby they shall be voted in the same proportion as the aggregate vote of all other outstanding shares in any sale, merger, or liquidation event.” This assists that a departed founder can’t hold the company hostage or disrupt important decisions.

This second flavor of drag-along agreement has become increasingly popular in recent years, especially as startups face more complex dynamics between founders and investors. It’s a way to protect the company from the potential fallout of a founder’s departure, whether it’s due to personal differences, burnout, or other reasons.

Key Considerations and Negotiations

Let’s assume your company, which you co-founded with Sarah and Mike, has grown significantly. TechInvest, the venture capital firm that owns 60% of the company, is pushing for a sale to a larger tech company. You, Sarah, and Mike each own 10%, and the remaining 10% is held by employees. As founders, you’re emotionally invested in the company and want to make sure your voices are heard.

The size of your ownership stake plays a big role in how much drag-along terms matter to you. If you’re a small shareholder—say, you own just 1% of the company—your ability to influence the outcome of a sale is very limited. In most cases, a single small shareholder will not have much leverage to block a deal, even without a drag-along agreement. However, if there are many small shareholders like you, collectively holding a significant portion of the company, your combined influence could become a problem for the majority shareholders. This is why drag-along agreements are often included in term sheets—to prevent a fragmented group of small shareholders from derailing a deal.

But ownership isn’t the only factor. Where your company is incorporated also matters. Different jurisdictions have different rules about shareholder consent. For example, in California, a sale typically requires a majority vote from each class of shareholders (common and preferred). In Delaware, which is a popular state for incorporating startups, the rules are slightly different. There, a sale usually requires a majority vote of all shares on an “as-converted” basis, meaning preferred shares are treated as if they have been converted to common stock for voting purposes.

When negotiating drag-along terms, there is often room for compromise. One common approach is to align the drag-along rights with the majority of common stockholders rather than the preferred investors. In our example, this would mean that TechInvest could only force a sale if a majority of the common shareholders (you, Sarah, Mike, and the employees) also agreed. This gives the founders and employees more control over the outcome, while still making clear that the company can move forward if there is broad consensus.

Another strategy involves preferred investors converting some of their shares to common stock. This might sound counterintuitive, but it can actually benefit everyone. By converting preferred shares to common, investors can increase their voting power in a way that aligns with the common shareholders. For example, if TechInvest converts enough shares to common, they can help push through a sale that benefits both them and the common shareholders. This also reduces the overall liquidation preference, meaning there’s more money to go around for everyone in the event of a sale.

Negotiating drag-along agreements can get complicated, which is why having a good lawyer is a good idea. In our example, let’s say you hire a lawyer to negotiate the term sheet with TechInvest. During the discussions, your lawyer might push back hard against the drag-along provision, arguing that it limits your rights as a founder. While this might seem like they are protecting you, it could actually harm the company’s ability to secure funding or execute a sale down the line.

This is where conflicts can arise. If your lawyer is too focused on protecting your personal interests, they might overlook what is best for the company as a whole. For instance, if TechInvest walks away from the deal because they feel the drag-along terms are too weak, the company could lose out on critical funding. A good lawyer should strike a balance.

Practical Implications and Conclusion

Drag-along agreements come into play in situations where a company is being acquired, merging with another business, or going through liquidation. In these high-stakes moments, the last thing a company wants is for one or two shareholders to block the entire deal. Without a drag-along clause, even a single minority shareholder could refuse to sell, creating delays, legal battles, or even scaring off potential buyers.

For small shareholders—especially those who own only a fraction of the company—it’s important to recognize when a drag-along clause is actually worth fighting over. If you own just 1% of the company, your ability to stop a sale is already limited, even without a drag-along. However, if you and a large group of small investors collectively own 30% or more, then these provisions matter a lot more because together, you might actually have the power to influence a sale. In these cases, understanding the specific voting thresholds and how drag-along provisions are structured can make a real difference.

These agreements exist because different types of shareholders have different priorities. Preferred investors, usually venture capital firms, want flexibility when it comes to selling the company. They invested with the expectation of a strong return, and they don’t want a few dissenters standing in the way when the right buyer comes along. Common shareholders, including founders and employees with stock options, might have a different perspective. As mentioned earlier, founders are often emotionally attached to the company and may want to hold out for a better deal-or not sell at all. Employees who own stock may not be enthusiastic about a sale if it does not include meaningful payouts for them. In most cases, these agreements are structured to favor investors because they have more bargaining power. However, founders who understand their options can sometimes push for fairer terms that give them a stronger voice in the decision-making process.

If you’re a small shareholder, it’s worth asking yourself: Does this really affect me? If your ownership stake is tiny, there may be more important things to focus on in the negotiations. But if you hold a significant portion of common stock—especially as a founder—you should make sure the terms are fair and that you are not giving up too much control.

At the end of the day, drag-along agreements are designed to keep things moving when a sale is on the table. Whether that is a good thing or a bad thing depends entirely on your position. If you are an investor, you probably want strong drag-along rights to prevent holdouts from blocking a deal. If you are a founder or employee, you’ll want to make sure you’re not being forced into a sale under terms that do not work for you.

The best way to protect yourself is to read the agreement carefully, ask the right questions, and, if needed, negotiate better terms before signing anything. Once the deal is done, you’re bound by those terms—so make sure you know exactly what you’re agreeing to.