Co-Sale rights (also known as "tag-along rights") grant investors the ability to participate in the sale of shares or assets by the creator-founder or other equity holders. These rights protect investors by ensuring they are not left out of lucrative deals involving a partial or full sale of the business.
2. Why Co-Sale Rights Are Important
- Investor Protection: Prevents a scenario where the creator-founder sells a significant stake or subsidiary without involving existing investors, leaving them in a vulnerable position.
- Shared Upside: Ensures that investors can benefit proportionally from the liquidity event.
- Alignment with Founder: Keeps the interests of the founder and investors aligned during potential exits or strategic sales.
- Control for Strategic Sales: Investors can block certain deals or opt-in to sell their stake alongside the founder, ensuring favorable terms.
3. Key Expectations from Co-Sale Rights
- Transparency in Sale Events:
- Creator-founders must inform investors of any intention to sell equity or subsidiaries in advance.
- Specific timelines and mechanisms are outlined for investors to exercise their Co-Sale rights.
- Pro-Rata Participation:
- Investors can sell a proportional amount of their shares alongside the founder in a partial or full sale.
- Terms of Sale:
- Investors expect equal or better terms than the founder in any sale event, ensuring fairness in valuation and exit terms.
- Applicability to Subsidiaries:
- Co-Sale rights may extend not just to HoldCo equity but also to significant subsidiaries or brands under the HoldCo umbrella.
- Right of Refusal:
- In cases where an investor prefers to retain their equity stake, Co-Sale rights allow them to refuse participation in the sale while still maintaining their proportional ownership.
4. Challenges and Considerations
- Complexity in Multi-Subsidiary Structures:
- Creator HoldCos often have multiple subsidiaries with varying valuations. Co-Sale terms need to clearly define how they apply to these entities.
- Creator Liquidity Needs:
- While Co-Sale rights protect investors, they might conflict with the creator-founder’s need for personal liquidity or strategic partnerships.
- Negotiation of Rights:
- Balancing creator and investor interests during the negotiation of Co-Sale rights is key to maintaining a productive partnership.
5. How This Applies to Creator HoldCos
For a creator-led HoldCo, Co-Sale rights are critical to managing the complex dynamics of:
- Subsidiary Exits: If the HoldCo sells off a subsidiary, investors may want to share in the proceeds or have a say in the sale terms.
- Strategic Equity Sales: As creators often attract buyers from industries like media, tech, or retail, Co-Sale rights ensure existing investors are included in lucrative deals.
- Alignment with Investors: By establishing clear Co-Sale terms, both creators and investors can avoid disputes during liquidity events.
Cash Positice.
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