What is ROFR (Right of First Refusal)?
The Right of First Refusal (ROFR) is a legal clause, common in shareholder agreements and employee option contracts, that grants existing shareholders or the company itself the contractual right to purchase shares being sold by another shareholder before those shares can be offered to an outside buyer.
In essence, it gives the current owners priority access to the equity, maintaining control over the composition of the Cap Table.
How it Works If an early investor decides to sell their equity to a third-party private buyer:
- The investor must present the company (or the ROFR holder) with the exact price and terms of the third-party offer.
- The company or existing shareholders then have a set period (usually 30 days) to decide whether to match those terms and purchase the shares themselves.
- If the ROFR holder declines, the shares can then be sold to the original third party.
The Purpose: Controlling the Cap Table Investors and founders implement ROFR to:
- Prevent Hostile Buyers: Stop competitors or unknown, potentially disruptive individuals from gaining access to the company’s financials and sensitive data.
- Maintain Concentration: Keep ownership centralized among those already committed to the company's long-term vision.
ROFR is often packaged alongside Tag-Along Rights and Drag-Along Rights to govern the rules of equity transfer and sale.
Key Takeaway: ROFR is a defensive mechanism. It doesn't guarantee a sale, but it ensures that the company and its major investors always have the first chance to vet and approve who joins the equity club.
