What is the right of first refusal (ROFR)?
The right of first refusal (ROFR) is a term that you may have heard before in multiple contexts. Generally speaking, it is a contractual first right to enter into a business transaction with a person or company. If the party who holds this right declines to enter into a transaction, the party who is bound to this contract is free to pursue other offers. The right of first refusal is often used in real estate as well as the venture capital space.
In this blog, we will review what the right of first refusal means in secondary transactions, what that process and timeline look like, and how it impacts secondary buyers and sellers.
Right of first refusal in secondary transactions
The right of first refusal (ROFR) is a common transfer restriction. Before company shares may be sold or otherwise transferred, the Company and/or its assignee(s) will have a right of first refusal (essentially first dibs) to purchase the shares to be sold or transferred. This means that, should a shareholder wish to sell their shares to a third-party, the Company could block this sale and offer to purchase the shares instead.
Most employee option agreements include some sort of ROFR provision, which means most secondary transactions may be subject to a ROFR. One reason many companies include a ROFR provision is to maximize ownership. Typically, the ROFR will terminate upon an IPO of the Company.
Right of first refusal process & timeline
Because we often list secondary offerings on our platform, we deal with ROFRs with some frequency. From start to finish, this is what the ROFR process looks like for secondary transactions:
- Transfer Notice: First, we will send the Company a notice of a proposed transfer. It will state the seller shareholder’s intention to sell the shares and detail the terms of the transfer. This will include the name of the proposed transferee, the number of shares, the price, or other considerations.
- ROFR Period Triggered: Once the transfer notice has been sent, the ROFR period has been triggered. Typically, the ROFR period is 30 days.
- Company Deliberation: During the ROFR period, the Company has a few options. It can let the ROFR expire after the 30 days or waive the ROFR early before the end of the 30 days. It could also choose to exercise its ROFR at any time within the 30 days. It does this by letting the shareholder know that it or an assignee will be purchasing the shares. In the event that the company does not meet this 30-day deadline, the seller is free to move forward with the sale to a third-party buyer.
- Transaction Finalized: If the Company decides to exercise its ROFR, the seller will not be able to sell their shares to the initial third-party buyer. They will either sell the shares back to the Company or the Company will assign its right to an investor. The buyer must purchase the shares at the same proposed terms as set forth in the proposed transfer notice. If the proposed terms include a non-cash consideration, the cash equivalent value would be determined.
What does a ROFR mean for secondary sellers and buyers?
A ROFR can make secondary transactions more complicated, or even block them entirely. When a company exercises its ROFR, the seller can expect a similar financial outcome as they would have gotten if they had been able to sell to the third-party buyer. Unfortunately for the buyer, when a ROFR is exercised, they’re simply out of luck.
Are you a private shareholder seeking to liquify your existing shares? We have a large and active community of accredited and institutional investors seeking opportunities to invest in private companies, oftentimes via secondary transactions. In addition to our network of qualified investors, we are able to facilitate efficient and secure secondary transactions on our platform. You can learn more about our secondary transaction process or submit an inquiry here.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.