Right of First Refusal (ROFR)
A contractual right that gives the company or existing shareholders the opportunity to purchase shares before the holder can sell them to a third party.
What Is a Right of First Refusal?
A right of first refusal (ROFR) is a contractual provision that requires you to offer your shares to the company (or existing shareholders) before selling to an outside buyer. If you receive an offer from a third party to buy your shares, the ROFR holder has the right to match that offer and purchase the shares instead. Only if the company or existing shareholders decline can you proceed with the third-party sale.
Nearly all private company stock option agreements and shareholder agreements include a ROFR. It is one of the most common restrictions on employee-held shares and a major factor in the liquidity of private company stock.
How ROFR Works
The Process
- You receive an offer: A third-party buyer (often a secondary market fund or another investor) offers to purchase your shares at a specified price.
- You notify the company: Under the ROFR, you must provide written notice to the company detailing the proposed sale — the buyer, price, number of shares, and other material terms.
- Company review period: The company (and sometimes existing investors) has a defined period, typically 30 to 60 days, to decide whether to exercise the ROFR and purchase the shares at the same price and terms.
- Company exercises or declines: If the company exercises the ROFR, it buys the shares from you at the offered price. If it declines, you can proceed with the third-party sale on the same terms described in the notice.
- Time-limited approval: If you do not complete the sale within a specified period (often 60 to 90 days after the company declines), the ROFR resets, and you must go through the process again for any new sale.
Variations
Some ROFRs allow the company to purchase at any price (not just the offered price), though this is less common. Others extend the ROFR to existing investors, giving them the right to purchase pro rata before a third-party sale. Some plans also include a right of co-sale (tag-along right), allowing other shareholders to participate in the sale alongside you.
Practical Implications for Startup Employees
Liquidity Constraints
The ROFR is the primary reason why selling private company stock is difficult even when you find a willing buyer. The company can block the sale by exercising its right. Many companies routinely exercise ROFRs to prevent shares from ending up in the hands of outside investors they do not want on the cap table. This makes the ROFR a practical barrier to liquidity.
Secondary Market Sales
If you are considering selling shares on a secondary market platform (such as Forge, EquityZen, or Nasdaq Private Market), you must factor in the ROFR process. The platform typically handles the notification process, but the company retains the right to block the sale. Some companies have established policies about secondary sales — some permit them with conditions, others decline all requests.
Company-Sponsored Tender Offers
Some companies offer periodic tender offers, allowing employees to sell shares directly to the company or approved buyers. These transactions bypass the ROFR issue because the company is the buyer. Tender offers are the most common liquidity mechanism at late-stage private companies.
Exercising Options with a ROFR
The ROFR applies to shares, not options. You can exercise your options freely. The ROFR only comes into play when you try to sell or transfer the resulting shares. However, knowing that a ROFR exists should factor into your exercise decision: exercising options ties up cash in shares that you may not be able to sell when you want to.
ROFR at IPO
ROFRs typically terminate upon an IPO or a change of control event. Once the company is publicly traded, you can sell shares on the open market without ROFR restrictions (though other restrictions like lockup periods and Rule 144 may apply).
How It Relates to Exercising Stock Options
The ROFR is a critical consideration when deciding whether to exercise stock options at a private company. If you exercise and hold shares, the ROFR means you cannot guarantee liquidity. You may plan to sell shares on the secondary market to recover your exercise cost and tax payments, only to have the company exercise the ROFR and block the sale. Before exercising, understand your company's ROFR terms and its historical willingness to approve secondary sales. If the company routinely blocks sales, your exercised shares may remain illiquid until an IPO or acquisition — factor that timeline into your financial planning.