In venture-backed startups, control of the cap table is critical. The Right of First Refusal and Co-Sale Agreement (ROFR/Co-Sale) helps founders and investors maintain that control by regulating how shares are transferred - particularly when founders, early employees, or other major holders want to sell.
This agreement acts as a gatekeeper for secondary sales, balancing liquidity needs with governance integrity.
What Is a ROFR and Co-Sale Agreement?
Right of First Refusal (ROFR)
Gives the company and/or investors the ability to purchase shares before they are sold to a third party.
Co-Sale Rights
Allow investors to “tag along” and sell a proportional number of their shares if a founder or major holder sells theirs.
Typical Structure
ROFR Hierarchy
- Company has first right to purchase
- If declined, investors can step in
- If all refuse, sale proceeds as proposed
Co-Sale Mechanics
- Triggered only for certain sales (e.g., founder transfers above a threshold)
- Ensures that major investors aren’t left behind in liquidity events
Transfer Restrictions
- Prohibits transfers without notice and compliance with ROFR/Co-Sale provisions
Founder Considerations
Liquidity Limitations
- ROFR can make it harder to sell personal shares
- Founders should negotiate limited carve-outs for estate planning or small liquidity events
Reputation Management
- Co-sale ensures alignment, but frequent triggers can cause tension with investors or the market
Notification Burden
- Founders must notify parties and coordinate timing before any sale
Best Practices
Reasonable Carve-Outs
- Exclude transfers to family trusts or affiliates
- Consider thresholds before co-sale kicks in
Alignment With Investor Rights
- Sync ROFR and Co-Sale terms with those in other investor documents
Be Realistic About Enforcement
- While these rights are often standard, their actual use is relatively rare - but still important for governance
Conclusion
The ROFR and Co-Sale Agreement protects cap table cohesion and investor fairness during share transfers. Done right, it balances founder liquidity with governance integrity.
Need help customizing ROFR/Co-Sale terms in your next round? We help founders build balanced frameworks that support long-term growth and strategic flexibility.
Frequently Asked Questions
FAQs
What’s the difference between ROFR and co-sale rights?
ROFR gives the company or investors the right to buy shares before outsiders. Co-sale rights let investors “tag along” and sell their shares alongside a selling shareholder.
Do ROFR and co-sale rights apply to all shareholders?
Not always. These provisions usually apply to founders and major holders, not to every employee or option holder.
Can founders negotiate exceptions to ROFR/Co-Sale?
Yes. Founders often negotiate carve-outs for estate planning transfers, gifts, or small private sales.
Are these rights actually used in practice?
Yes, but selectively. While ROFR and co-sale rights are often more about governance than daily use, they remain an important safety net for investors.
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