Right of First Refusal (ROFR)

Explaination: The Right of First Refusal refers to the right of investors to have the opportunity of matching the price at which a third party has agreed to buy shares from existing investors or founders.

How it applies to Startup/Investor and its impact: Investors generally negotiate for ROFR when the Founders or other Investors are willing to sell their shares as they have to match the price at which third-party is willing to purchase such shares of Founders or Existing Investors. One more reason why Investors are inclined towards ROFR right is because they get to know what is the price of the shares in the market and this makes their job easy as to whether they want to increase their stake in the Company or not.

This right gives the right holder the option to get more involved at a later point. Such a right however is time bound and therefore after expiry of the period the seller is free to pursue other buyers.

Note for Startups – A ROFR contains a longer and more extensive method to liquidate shares of a company. A startup should try to provide the investor with a ROFO rather than a ROFR.