Why does Right of First Refusal (ROFR) matter?
It gives the company and its existing investors control over who ends up on the cap table, without it, any shareholder could sell to an unknown or even competitor-affiliated buyer with no say from the company. It also shapes how easily a founder or early employee can achieve liquidity through a secondary sale, since a ROFR holder has to formally pass before an outside sale can close, adding a real step and timeline to any planned transaction.
What does Right of First Refusal (ROFR) look like in practice?
Suppose an early employee wants to sell a portion of their vested shares to an outside investor at an agreed price. Before that sale can close, the ROFR requires offering the company, and often existing major investors, the chance to buy those same shares on the same terms first. If the company exercises its right, the outside investor's planned purchase falls through and the employee's shares are instead bought by the company, a possibility that has to be priced into how confidently anyone plans a secondary sale.
What are the common mistakes with Right of First Refusal (ROFR)?
- Assuming an agreed price with an outside buyer means a secondary sale is done, without accounting for the time and uncertainty the ROFR process adds before it is final.
- Not checking who actually holds ROFR rights, and in what order they get to exercise.
- Treating ROFR and drag-along or tag-along rights as the same mechanism, when ROFR controls who can buy in, while the others control who must or may join an existing sale.
- Missing the exercise window deadline in the governing documents, either as a seller planning around it or as the company trying to actually use the right in time.
Related concepts
- Secondary SaleThe sale of already-issued shares from an existing shareholder (a founder, early employee, or early investor) to a new or existing investor, with the proceeds going to that shareholder rather than to the company as new capital.
- Tag-Along Rights (Co-Sale Rights)A provision letting minority shareholders participate in a sale that a majority holder is making, selling their own shares on the same terms, rather than being left behind holding stock in a company now controlled by a new, unknown buyer.
- Cap TableThe authoritative record of who owns what in a company, every founder, investor, and option holder, with share counts, security type, and percentage ownership.