On the other hand, if many of your investors use their co-sales rights, you can expect a radical change. A new investor with a majority can throw a lot of weight. This weight continues to increase when he or she receives even more co-sales shares. If the investor receives most of your company`s shares, that investor can replace all directors, partners, officers and other executives as much as he wants. However, this is only the most pessimistic scenario. The venture capital firm has a ROFR, which allows them to buy all the founders` shares for $15, if they wish, and withdraw SUC from the agreement. They also have a co-sale right, which allows them to sell their shares to DieSUC for $15 and force them to buy up to 80 percent of the business instead of 50. Some of the employees and small investors may also have ROFR and co-sale rights, others may not. The ROFR/Co-Sale contract rarely receives more than superficial comments in typical business financing.
The ROFR/Co-Sale requires a founder, the board of directors and investors to send a written notice on possible transfers, giving the company and investors time to assess whether they wish to buy the shares (or participate in the “co-sale” of the shares. I have never heard that a right of co-sale is in fact invoked, although I know that many companies remind former founders of their CSR obligations. it is important to note that the ro and co-sale rights can be reserved for large investors. The right of pre-emption and the co-purchase contract regulate how and to whom founders and employees can sell their shares. One of the drawbacks of co-sale rights is that the purchasers of these shares (in our example of Company A) can obtain a very large majority stake in the acquired company, which may worry the remaining shareholders and mean that a new board or management is on the way. Co-sale rights are generally good for minority shareholders because they can benefit from an agreement that another shareholder can enter into. In particular, a majority shareholder may have access to potential buyers and negotiate terms or prices that are better than minority shareholders. In addition, it can be difficult to find buyers for shares of private companies; Co-sale rights allow minority shareholders to seize a chance to obtain cash. It is not uncommon for preferred investors to require start-up creators to enter into a co-sale contract. Co-sale rights give investors the right to participate in a transaction when founders sell their shares to third parties. The co-sale rights, also known as Tag Along rights, allow investors to sell their shares under the same terms as the founders.
In the event that the company proposes the transfer of shares, it is entitled to purchase the shares under the same terms as the proposed sale. If the company does not exercise its prerogative, Preferred holders have a reference right (in proportion to the privileged holders) with respect to the proposed transfer.