Right of First Refusal (ROFR) | Futureproof

Right of First Refusal (ROFR)

Quick Definition

The right to match any offer a shareholder receives before they can sell to a third party.

What is Right of First Refusal?

Right of First Refusal (ROFR) gives existing shareholders or the company the opportunity to purchase shares before they can be sold to an outside buyer. If an employee wants to sell their vested shares, ROFR holders can buy them at the same price the outside buyer offered.

Why ROFR Matters

ROFR helps companies and investors control who becomes a shareholder. It prevents shares from ending up with competitors, problematic individuals, or random third parties who might complicate future governance or exits.

For founders, ROFR is standard in investor documents. It protects the cap table from unwanted participants while still allowing shareholders to sell if no one exercises the right.

The ROFR Process

When a shareholder wants to sell, they must notify ROFR holders with the terms. Holders typically have 30 days to decide. If they pass, the sale can proceed to the outside buyer.

Formula

ROFR Process:

Shareholder receives third-party offer
Notifies company and ROFR holders
ROFR holders have 30 days to match
If matched, they purchase at same price
If passed, sale proceeds to third party

Example

An early employee at your SaaS company wants liquidity:

Employee has: 10,000 vested shares
Secondary buyer offers: $15 per share ($150,000 total)

ROFR process:

Employee notifies company of the offer
Company has 30 days to match at $15/share
If company passes, existing investors have 30 days
If all pass, employee can sell to the secondary buyer

Related Terms

Pro Rata Rights

The right for existing investors to participate in future funding rounds to maintain their ownership percentage.

Common Stock

Basic ownership shares with voting rights but no special preferences, typically held by founders and employees.

Term Sheet

A non-binding document outlining the key terms of a proposed investment before final legal documents are drafted.