Legal & Compliance
What is a right of first refusal (ROFR)?
A right of first refusal gives an investor or the company the right to purchase shares before a shareholder can sell them to a third party. It's a standard provision designed to give existing stakeholders control over who joins the cap table.
Right of first refusal (ROFR) is a contractual right that allows a designated party to match a purchase offer before the seller can accept it from someone else.
In startup equity, ROFR works like this: if an employee or early investor wants to sell their shares to a secondary buyer, they must first offer those shares to existing stakeholders (the company, existing investors, or both) at the same price and terms.
This matters for several reasons:
**Cap table control.** Existing investors and founders don't necessarily want unknown third parties owning significant stakes. ROFR lets them block sales to parties they haven't vetted.
**Secondary market implications.** As companies stay private longer, secondary transactions have become more common. ROFR provisions can complicate or block these transactions, which affects employees' ability to get liquidity before an IPO.
**Right of co-sale.** ROFR is often paired with co-sale (also called tag-along) rights, which give investors the right to sell their shares alongside a founder if the founder is selling. This prevents a founder from selling out while leaving investors behind.
Standard investor documents (the NVCA model documents, Y Combinator's standard forms) include ROFR provisions. The specific carve-outs and thresholds (ROFR often doesn't apply to small transfers, gifts to family members, or transfers to estate planning trusts) are negotiated at the term sheet stage.