A right of first refusal (ROFR) gives existing investors or the company the contractual right to match any outside offer before a founder or shareholder can sell shares to a third party. ROFR provisions are standard in private company stockholders' agreements and are disclosed in SEC registration statements when companies go public. See sec.gov/edgar.
A right of first refusal (ROFR) is a contractual provision — typically in an investor rights agreement, stockholders' agreement, or company charter — that restricts the free transferability of shares. Before a stockholder can sell shares to a third party, they must first offer those shares to the ROFR holders (the company, existing investors, or both) on the same terms. Standard ROFR mechanics: 1. Selling stockholder receives a bona fide third-party offer 2. Stockholder provides written notice to ROFR holders with offer terms (price, form of consideration, timeline) 3. ROFR holders have a defined window (typically 30-60 days) to exercise their right to match the offer 4. If exercised, ROFR holders buy shares at the offered price; if not exercised, stockholder may sell to the third party on the same terms within a defined window (60-90 days) ROFR hierarchy: Most NVCA-standard documents have a two-tier ROFR: first the company has rights, then major investors. This allows the company to repurchase shares (treasury stock) before investors exercise, and investors exercise before shares go to outside buyers. Related provisions: - Right of First Offer (ROFO): Stockholder must offer to existing holders before going to market — less common, less information-leaking than ROFR. - Co-sale rights (tag-along): If a major investor sells, other investors can tag along and sell a pro-rata share on the same terms. - Drag-along rights: If a specified majority approves a sale, minority shareholders must also sell — prevents minority holders from blocking deals. Practical relevance for small businesses: Small business owners considering SBA loans or growth capital should be aware that investors with ROFR rights can complicate secondary transactions, acqui-hires, and exit planning. Banks and SBA lenders review ROFR provisions in company governing documents as part of collateral due diligence. See sba.gov for SBA loan eligibility requirements related to ownership structures.
A right of first refusal (ROFR) triggers after the stockholder has a third-party offer in hand — the ROFR holder can match it. A right of first offer (ROFO) requires the stockholder to offer shares to existing holders before going to market. ROFR is more common and more protective for existing holders because they have certainty of price; ROFO requires negotiation before market price discovery.
Yes, ROFR rights can be waived in writing by the holder. Many secondary transactions proceed after investors execute ROFR waivers as a courtesy to the selling founder. Companies seeking to facilitate founder liquidity programs (secondary tender offers) typically negotiate blanket ROFR waivers from all major investors as a condition of the program.
Potentially yes. Lenders taking a pledge of company shares as collateral must confirm that ROFR provisions don't restrict the lender's ability to foreclose and sell the pledged shares. Most institutional lenders require either a waiver of ROFR from all holders or a legal opinion that ROFR doesn't apply to foreclosure transfers. Review your operating agreement and investor rights agreement before pledging equity.