Right of first refusal
What is a right of first refusal in a startup?
A right of first refusal (ROFR) gives an existing shareholder the ability to purchase shares before the selling shareholder can sell them to a third party. If a founder wants to sell shares in a secondary transaction, the company and investors with ROFR must be offered the shares first at the same price and terms. ROFR is a standard provision in the NVCA model investor rights agreement and protects the cap table from unknown third parties acquiring meaningful positions.
How does ROFR work when a founder wants to sell shares?
| Step | What happens |
|---|---|
| 1. Founder receives third-party offer | Buyer offers a price per share for a block of founder shares |
| 2. Founder notifies company in writing | Must give notice of offer terms within the ROFR notice period (typically 30 days) |
| 3. Company exercises or waives | Company then investors can match the offer and buy the shares at the same price |
| 4. If waived | Founder can proceed with the original third-party buyer on the same terms |
| 5. If exercised | Company or investor buys the shares; third-party deal does not proceed |
How does ROFR differ from co-sale rights?
ROFR gives existing shareholders the right to buy shares before an outside buyer enters. Right of co-sale (tag along) gives them the right to sell alongside the selling founder on the same terms. ROFR protects the cap table composition; co-sale protects minority holders from being left behind. Both appear in the same investor rights agreement.
How does ROFR interact with co-sale rights in a secondary share sale?
Right of first refusal and co-sale rights (tag along) are complementary mechanisms that operate in sequence. If a founder wants to sell shares, ROFR holders (typically the company first, then investors) have the right to buy those shares at the founder's offered price before any third party can. If ROFR holders waive their right to purchase, co-sale holders then have the right to participate in the sale by selling their own shares alongside the founder, pro-rata to their ownership. This means a founder attempting a secondary sale may have their intended sale size reduced if co-sale holders elect to participate, since the total transaction stays the same size but more sellers participate.
What happens when ROFR is exercised by investors rather than the company?
Most investor rights agreements give ROFR to the company first, then to investors pro-rata if the company declines. If the company cannot afford to exercise ROFR (insufficient cash reserves), investors step in as secondary ROFR holders. This can result in the selling founder's shares being purchased by other investors at the secondary price rather than by a third-party buyer. From the founder's perspective, the economic outcome is the same (they receive the agreed price), but the cap table effect is different: the buying investors increase their ownership percentage at the expense of the selling founder. The NVCA model investor rights agreement sets out the standard ROFR waterfall and notice periods.
What do founders get wrong with right of first refusal?
The most common mistake is not understanding that ROFR applies to involuntary transfers as well as voluntary sales in many agreements. Transfers upon death, divorce, or to trusts for estate planning purposes may trigger ROFR in poorly drafted agreements. Founders should ensure their investor rights agreement explicitly exempts standard estate planning transfers from ROFR obligations, or these transfers can become unexpectedly complicated.
A second error is not tracking the ROFR notice deadline. If a founder sends a ROFR notice and the investor does not respond within the exercise window (typically 15 to 30 days), the right lapses for that transaction. Founders should send ROFR notices formally and document the response (or non-response) carefully, as failure to follow the notice procedure can invalidate the entire secondary sale.
Third: assuming ROFR is the same as right of first offer (ROFO). ROFR requires the seller to bring an existing third-party offer to existing holders and give them the right to match it. ROFO requires the seller to offer shares to existing holders first before approaching third parties. ROFO is more seller-friendly because the seller sets the opening price. Founders who sign agreements believing they have ROFO protection but actually have ROFR have less flexibility in secondary transactions.
How it works in practice
Case example: Founder secondary sale, ROFR exercised
A Series A-stage founder wants to sell $500K of personal shares to a family office as a secondary transaction. The family office offers $8 per share. The founder notifies the company, triggering ROFR for the company first, then the Series A investor.
The company waives its ROFR (no cash to deploy for secondary purchases). The Series A investor exercises: they purchase the $500K block at $8/share. The family office does not acquire a position. The cap table remains with the same known shareholders.
The Series A investor exercises because they want to increase their position at a favourable price before the Series B. The founder gets the liquidity they needed. The company avoids an unknown new shareholder. ROFR functions exactly as designed.
Frequently asked questions
Does ROFR apply to all share transfers?
No. Most agreements exempt transfers for estate planning, to family trusts, to affiliates, or to immediate family members. Only arm's length sales to unrelated third parties trigger ROFR. The specific exemptions are listed in the investor rights agreement.
Can a company waive its ROFR?
Yes. The company and investors can waive their right for a specific transaction. This is common in secondary sales where a strategic investor is acquiring founder shares and the company and existing investors are comfortable with the new party joining the cap table.
What happens if the ROFR holder cannot match the offered price?
If the company or investor cannot or chooses not to match the third-party offer, ROFR is waived for that transaction. The founder can then proceed to sell to the original buyer on the same terms that were disclosed in the ROFR notice.
Is ROFR the same as a right of first offer?
No. ROFR is triggered by a specific offer already received, the holder matches or passes. Right of First Offer (ROFO) requires the seller to offer shares to existing holders before seeking a third-party buyer. ROFR is more founder-favourable because the founder can negotiate with outside buyers freely before triggering it.
Does ROFR apply to transfers between existing investors?
Typically no. ROFR is usually structured to apply only when a founder or major common shareholder wants to sell shares to a third party. Transfers between existing preferred investors are generally exempt, as are transfers by investors to affiliated funds. Founders should confirm exactly which transfers trigger ROFR in their specific investor rights agreement, as definitions vary by company.
Related glossary terms
- Tag Along Rights, gives minority holders the right to join a secondary sale on the same terms
- Drag Along Rights, compels minority holders to join an acquisition, the inverse of ROFR
- Investor Rights Agreement, the document where ROFR, co-sale rights, and information rights are all set out at Series A close
Explore related Fintera content
- How to Prepare Financials for a Series A Raise, the due diligence process where shareholder rights including ROFR are reviewed in full
- When to Hire a CFO: 9 Signs It's Time, when equity structure complexity signals the need for senior finance leadership
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