Michael Arrington talks about the sale of FilmLoop. Due to drag-along rights, ComVentures was able to force an unfavorable sale to another company in its portfolio - leaving the founders with essentially nothing.

One day, the founders and employees of FilmLoop had a viable company with $3 million in the bank. The next day they had no stock, no job, and no company.

Drag-along rights (and its counterpart, tag-along rights) are fairly standard terms in a stock agreement. Drag-along rights mean you can force the other shareholders to join in the sale of the stock at the same price, terms and conditions. This would normally come into play if someone made an offer for the company but one of the founders decides not to sell - this clause allows the VC to compel the sale. Tag-along rights are the opposite, usually giving a minority shareholder the ability to participate in a sale - if the majority shareholder wants to sell, he can't do so without including the minority shareholder.

I'll post more about the structure of VC fund in the future, but generally speaking a VC is not investing in "cash cows". Rather, they're going to be looking for an exit in a 3-5 year window and a significant increase. In other words, the VC prefers a home run, and in many cases is going to prefer you swinging for the fences and striking out as opposed to getting singles. These rights are usually there to ensure that, if the home run (or triple) is there, they can take advantage.

As you can see here, they can also be used in, shall we say, less ethical ways. All the more reason to be careful who you take your money from.