As startups grow and equity stakes shift, controlling who owns shares becomes increasingly important. One of the most effective tools for managing this is the Right of First Refusal (ROFR).
ROFR provisions give companies and/or investors the option to purchase shares before they are sold to outside parties. Common in venture-backed shareholder agreements, ROFRs help protect companies from unwanted or strategically risky equity transfers. But they must be structured carefully to balance control with founder and employee flexibility.
ROFR Basics: What It Means and How It Works
A ROFR gives a company and/or its investors the option—but not the obligation—to purchase shares offered for sale by another shareholder before those shares are sold to an external buyer.
Typically, the process works like this:
- A shareholder receives an offer from a third party.
- They must notify the company and investors of the proposed sale.
- The company and/or investors have a specified period (often 30–60 days) to match the offer.
- If they decline, the sale may proceed under the original terms.
Who Holds ROFR Rights?
Tiered Enforcement
- Often begins with the company: the right to purchase offered shares before anyone else.
- If the company passes, rights may then pass to preferred shareholders or specified investor groups.
Coverage Scope
- May apply to all shareholders or only certain classes (e.g., common vs. preferred)
- Sometimes limited to specific share types or excluded for certain transfers (e.g., family gifts or estate planning)
Duration and Expiry
- ROFRs can be perpetual, time-limited, or expire upon an IPO or acquisition
- May include termination triggers like a specific valuation threshold or funding milestone
Strategic Considerations for Founders
Liquidity vs. Control
ROFRs can limit liquidity for founders and employees, as shares are harder to sell freely. However, they protect cap table cohesion and strategic alignment.
Customizing for Flexibility
- Consider carve-outs for estate planning or small private transfers
- Negotiate time limits or thresholds for exercising rights
- Ensure ROFRs don’t unintentionally block key hires or early team members from accessing liquidity
Investor Objectives
Preserving Ownership Alignment
Investors use ROFRs to:
- Maintain influence over the shareholder base
- Prevent strategic misalignment through secondary sales
- Consolidate stakes opportunistically
Potential Downsides
- Delays in transactions due to response periods
- Chilling effect on private sales, especially for common stock holders
ROFRs in Practice
ROFRs rarely stop every sale, but they give the company and its key investors a seat at the table before new shareholders appear. They’re best used as a governance mechanism—not a roadblock to founder liquidity.
Need help assessing or negotiating a ROFR in your financing documents? We offer guidance on crafting rights that safeguard company control while supporting long-term stakeholder alignment.
Frequently Asked Questions
FAQs
What is the difference between ROFR and ROFO?
A ROFR (Right of First Refusal) allows the company or investors to match a third-party offer. A ROFO (Right of First Offer) requires the shareholder to offer their shares internally before seeking outside buyers.
Do ROFRs apply to all shareholders?
Not always. ROFRs may apply only to certain classes (e.g., preferred stockholders) or exclude transfers such as estate planning or gifts.
How long do companies or investors have to exercise a ROFR?
Typically 30–60 days, though shorter timelines may be negotiated to avoid deal delays.
Can ROFRs make it harder for founders to sell shares?
Yes. While ROFRs protect control, they can limit founder or employee liquidity if structured too rigidly. Negotiating carve-outs can help preserve flexibility.
Don't DIY your legal anymore
Leave it to the pros.