Fundraising
ROFR (Right of First Refusal)
A contractual right that gives existing shareholders the first opportunity to buy shares that another shareholder wants to sell, on the same terms offered by an outside party.
In plain English
A shareholder gets an offer from outside to buy their shares. Existing shareholders (often the company or other investors) get to match the offer first. If they don't match, the sale to the outsider proceeds.
Example
An early employee leaves and wants to sell $200k of vested shares to a secondary buyer at $5/share. Under ROFR, the company has 30 days to buy the shares at $5/share. If the company declines, the sale to the secondary buyer goes ahead.
Why it matters
ROFR controls who's on the cap table. Without it, shares can be sold to anyone — competitors, hostile buyers, or just unwanted investors. With it, the company and existing investors keep gatekeeping authority. Especially valuable as secondary markets for private company shares grow.
Common mistakes
- Confusing ROFR with right of first offer (ROFO) — ROFO requires the seller to offer first to existing shareholders before going to outside; ROFR only kicks in after an outside offer exists
- Not specifying who holds the ROFR — company first, then investors, in what waterfall
- Setting an unreasonably short response window — 14 days or less rarely gives realistic time to evaluate and fund the purchase
- Forgetting ROFR can be assigned to investors who then turn into the buyer (controversial; often negotiated)