From time to time, we receive questions from new angel investors asking about specific terms in investment agreements and how they apply when triggered. To address these inquiries, we have a series of articles on “Understanding Deal Terms“, explaining the key investment terms. Whether you’re new to investing or just need a refresher, we hope you’ll find this series useful in understanding deal terms.
What is the Right of First Refusal (ROFR)?
The Right of First Refusal (ROFR) is a contractual right that gives existing shareholders, typically investors or the company itself, the option to purchase shares before they are offered to an outside party. When a shareholder decides to sell their shares, they must first offer them to the holders of the ROFR under the same terms and conditions as would be offered to an external buyer.
How ROFR Works
When an early investor decides to sell their shares in the company, before they can sell these shares to an external party, they must first offer them to the other shareholders or the company itself who hold ROFR. The holders of the ROFR have a specified period (often 30 to 60 days) to decide whether to purchase the shares on the same terms offered by the external buyer.
Example: Suppose a founder wants to sell 10% of their shares for $1 million to an external buyer. The existing investors or the company itself, if they hold ROFR, must be given the opportunity to purchase those shares for $1 million before the founder can proceed with the sale to the outside party. If the ROFR holders decline or fail to exercise their right within the specified period, the founder is free to sell the shares to the external buyer.
Why ROFR Matters
ROFR is a powerful tool for existing investors and the company because it helps maintain control over the company’s ownership structure. Here’s why it’s important:
- Preventing Unwanted Shareholders: ROFR ensures that shares do not end up in the hands of unknown or potentially disruptive external parties. This is particularly important for maintaining a stable and cooperative shareholder base.
- Preserving Ownership Stakes: By exercising their ROFR, existing shareholders can prevent dilution of their control and influence within the company. This is crucial in maintaining a balance of power, especially in high-growth startups.
- Maintaining Valuation Integrity: ROFR helps protect the company’s valuation by preventing share sales at lower prices, which could negatively impact the perceived value of the company.
- Protecting Strategic Interests: ROFR allows the company or existing investors to purchase shares that might otherwise be acquired by a competitor, ensuring that strategic interests are safeguarded.
Join Us for a Deeper Dive into Deal Terms
If you’re interested in gaining a more comprehensive understanding of ROFR and other deal terms, don’t miss our upcoming AngelCentral MasterClass Series: Implications of Deal Terms Using Real World Case Studies on 19 July 2025 (Saturday).
This workshop will provide you with practical insights into how these terms are applied in real-world scenarios, equipping you with the knowledge to understand the implications and negotiate effectively.
This post is a part of the series of “Understanding Deal Terms”, find out more about the explanation of other deal terms:
