The short answer
A right of first refusal (ROFR) gives the company, and often its major investors, the right to buy shares a shareholder wants to sell to a third party, on the same terms the third party offered. It helps keep control over who ends up on the cap table.
- ROFR applies when a holder tries to sell shares to an outsider.
- The company usually gets to buy before major investors do.
- The buyer must match the outsider's price and terms.
- It's different from pro rata rights, which cover new shares.
How it works
When a shareholder, often a founder or employee, receives an offer for their shares, they must first offer those shares to the rights holders at the same price. If the company and investors pass, the holder can sell to the outsider. A related right, co-sale (or tag-along), lets investors sell alongside a founder who sells. These usually live in a ROFR and co-sale agreement and in the bylaws.
Worked example (hypothetical)
An early employee owns 100,000 vested shares and gets an offer of $3.00 per share from a secondary buyer. Under the ROFR, the company has 30 days to buy them at $3.00. It passes, but the lead investor buys 60,000 shares under its secondary right. The employee then sells the remaining 40,000 to the outside buyer at the same price.
Why it matters to a pre-seed or seed founder
A ROFR keeps strangers and competitors off your cap table, which matters more as employees and early angels look for liquidity. Make sure your bylaws or stock agreements include one from day one. Compare it with pro rata rights, which give investors access to new shares, and drag-along.
Frequently asked questions
Is a ROFR the same as pro rata?
No. A ROFR covers existing shares being sold; pro rata rights cover new shares the company issues.
Who usually holds the ROFR?
The company first, then major investors as a secondary right.
Does a ROFR stop founders from selling?
No, but it gives the company and investors the chance to buy first at the same terms.