Right of First Refusal
Investor right to purchase shares before a stockholder transfers them to a third party.
A right of first refusal (ROFR) in venture capital and private equity gives existing investors (or the company itself) the contractual right to purchase shares from a selling stockholder before those shares can be transferred to a third party. When a stockholder (typically a founder or employee) receives a bona fide offer from a third party to purchase their shares, they must first offer those shares to the ROFR holders on the same terms before completing the transfer.
ROFR provisions typically operate in a sequential order: first, the company has the right to purchase the offered shares; if the company does not exercise, the right passes to the preferred stockholders (typically pro-rata to their ownership); if they decline, the selling stockholder may complete the transfer to the third party on the offered terms.
ROFR protects existing investors by preventing unknown third parties—potentially competitors, hostile investors, or disruptive actors—from acquiring significant ownership stakes through secondary transactions. Without ROFR, founders or early employees could sell large blocks of shares to strategic buyers whose interests might not align with the company's direction.
ROFR also enables investors to maintain or increase their ownership percentages in secondary transactions, which matters especially as companies raise later rounds at higher valuations. Purchasing shares in secondary transactions at below-current-round prices can be economically attractive.
In practice, ROFRs are frequently waived in secondary sales to employees and founders who want to provide liquidity to early shareholders. Secondary market platforms (like Forge Global or Nasdaq Private Market) and tender offers by companies often involve negotiated ROFR waivers to facilitate orderly secondary transactions.
FAQs
How does the ROFR process work in practice?
When a stockholder receives a bona fide third-party offer to purchase their shares, they must provide written notice to the company and investors specifying the offer terms (buyer identity, price per share, number of shares, payment terms, and proposed closing date). The company and investors then have a specified notice period (typically 30 days for the company, another 30 days for investors) to elect whether to purchase some or all of the offered shares on the same terms. If ROFR holders collectively exercise on all shares, the third-party transfer is blocked. If they exercise on fewer shares, the seller may proceed with the transfer for the non-exercised portion.
What is the difference between right of first refusal and right of first offer?
Under a right of first refusal (ROFR), the selling stockholder must first receive a bona fide third-party offer, then offer the ROFR holders the right to match it. The seller sets the price through the third-party offer, and ROFR holders can match or decline. Under a right of first offer (ROFO), the seller must first offer the asset to the ROFO holder before soliciting third parties, typically specifying an offer price. If the ROFO holder declines, the seller can seek third-party buyers at a price not lower than the offered price. ROFO holders negotiate the price; ROFR holders react to a market-determined price.
Does a right of first refusal apply to all stock transfers?
ROFR provisions typically contain carve-outs for 'permitted transfers' that do not trigger the right of first refusal. Common permitted transfers include gifts to immediate family members or family trusts, transfers to entities wholly owned by the stockholder, transfers to the company pursuant to repurchase rights, and transfers among fund affiliates for investor entities. These carve-outs allow estate planning and organizational transfers without triggering the cumbersome ROFR notice-and-exercise process. Transfers outside these carve-outs—including sales to employees, founders, or outside investors—typically trigger ROFR.
Related Terms
Co-Sale Rights
Investor right to sell shares alongside a founder in a secondary transaction on the same terms.
Information Rights
Investor contractual rights to receive regular financial statements and company information.
Redemption Rights
Preferred stockholder right to require the company to repurchase shares after a specified period.
