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:
1. Shareholder receives third-party offer
2. Notifies company and ROFR holders
3. ROFR holders have 30 days to match
4. If matched, they purchase at same price
5. 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