A right of first refusal (ROFR) gives the company, and often its investors, the chance to buy a stockholder’s shares before they’re sold to an outsider, on the same terms. It keeps the cap table in friendly hands and gives insiders a first look at any secondary sale. A ROFR restricts transfers of individual shares. It doesn’t give anyone the power to block a sale of the company.
Key takeaways
- A ROFR usually comes from the priced-round documents, in a ROFR and Co-Sale Agreement.
- The company usually gets the first right to buy, and investors get the second.
- Which stockholders are bound depends on the documents and the stage. From the Series A on, investors are often bound too.
- Investors usually also get a co-sale right, which lets them sell alongside a selling stockholder instead of buying.
Where does the ROFR come from?
Usually from a ROFR and Co-Sale Agreement signed in a priced round on standard (NVCA-based) documents. It gives the company the first right and investors the second right to buy shares that a stockholder wants to sell. Lighter seed documents often don’t include one. Your equity plan and stock purchase agreements can also restrict transfers, and some companies require board approval for any transfer at all.
Who is bound by it?
The stockholders who sign the agreement. That can be founders and other significant common holders and, especially from the Series A on, investors as well. Read your own agreement to see who is covered.
How does the process work?
- Notice. The stockholder who wants to sell sends written notice with the buyer, price and terms.
- The company decides. It usually has about 30 days to buy some or all of the shares on the same terms.
- Other rights holders decide. Whatever the company doesn’t take, stockholders with the secondary right can buy, usually pro rata, and they can often take more if others pass.
- Co-sale. Holders who don’t buy may instead be able to sell some of their own shares to the buyer alongside the seller.
- The sale closes, but only to the named buyer, at the same or a higher price, and within a set window (often 60 to 90 days). Change the terms or miss the window, and the process starts over.
What is a co-sale (tag-along) right?
Instead of buying the seller’s shares, a stockholder with a co-sale right can sell a proportional piece of their own shares to the same buyer, on the same terms. It keeps one stockholder from cashing out alone. For example, say a stockholder holding 60% of the covered shares wants to sell 9,000 shares, and a stockholder holding 30% uses a co-sale right. They split the sale 60:30, so the seller sells 6,000 shares and the co-sale holder sells 3,000.
What transfers are exempt?
Standard exemptions include:
- Transfers to a family member or trust for estate planning
- Transfers to an affiliate, such as an investor’s related fund
- Transfers on death
- Repurchases by the company, for example of unvested shares
- Sometimes a small annual carve-out
Exempt transfers still usually need a transfer notice and a joinder, so the new holder is bound by the same agreements, and often board approval.
When does the ROFR end?
Most ROFR and co-sale agreements end automatically at an IPO or a sale of the company. After that, the only limits on reselling come from securities law and any lock-up.
Does a ROFR let investors block a sale of the company?
No. A ROFR applies when an individual stockholder sells their own shares. Standard ROFR provisions expressly exclude a merger or sale of the company. A sale of the company is governed by board approval, the stockholder vote, the preferred’s protective provisions and the drag-along. See Drag-Along Rights and What Are Protective Provisions?
Can I negotiate the ROFR?
Rarely out of a priced round. It’s a standard term. What you can negotiate:
- The exemptions: estate planning, affiliates, and a small annual carve-out
- Keeping the company first in priority
- Who is bound, so the agreement reaches only meaningful stakes
- Short, firm deadlines, so a proposed sale isn’t held up for months
Related: Pro Rata Rights · What Happens to Startup Stock When You Leave the Company · Series Seed Round
