Right of first refusal (ROFR): what it means for startups

Where does the ROFR come from?

Usually from two places, at two different times.

The company ROFR starts at formation. The standard place for it is each founder's restricted stock purchase agreement, which gives the company, or anyone the company assigns the right to, the first chance to buy the founder's shares on the same terms before they're sold or given away. Option agreements usually apply the same right to shares bought on exercise. Investors get no right of their own under these agreements. So even before you raise a priced round, a founder who wants to sell vested shares has to offer them to the company first. See Restricted Stock Purchase Agreement.

The investor ROFR arrives with the first priced round, in a ROFR and Co-Sale Agreement on the NVCA model documents or a similar form. It keeps the company first, gives investors a second right to buy and adds the co-sale right. Lighter seed documents often don't include one, and a SAFE round never does. Some companies also require board approval for any transfer at all.

What does the founder ROFR say?

The ROFR in a typical founder stock purchase agreement works like this:

1. Notice. Before selling or giving away any shares, the founder tells the company who the buyer is, how many shares and on what terms, including the price.
2. The company decides. It has 30 days to buy some or all of the shares at that price. If the price isn't cash, the board values it in good faith, and for a gift the company pays fair market value. It pays within 60 days of the notice.
3. The founder sells. Shares the company doesn't buy can go to the named buyer, at the same or a higher price, within 120 days of the notice. The buyer signs on to the same restrictions. Miss the window or improve the terms for the buyer, and the founder has to offer the shares to the company again.

Transfers to immediate family or a family trust are exempt, but the shares stay subject to the ROFR in the new holder's hands. A separate clause lets the company buy, at fair market value, shares that change hands involuntarily, for example in a divorce. Both rights end at an IPO, or when the company merges into a public company. The shares carry a legend on the certificate or the notice of issuance saying they're subject to these restrictions, which under Delaware's Section 202 is what lets the company enforce them against a later holder who didn't know about them.

What if our ROFR is in the bylaws?

Some companies put the company ROFR in the bylaws instead of, or as well as, the stock purchase agreements. That works, but check two things before your first priced round.

First, the scope. A bylaws ROFR written over "all shares" or "all securities" of the company reaches stock issued after it was adopted, including the preferred your investors buy and the preferred your SAFEs convert into. Investor counsel will flag it in diligence and ask for a bylaw amendment, adopted before or at the closing, that limits the ROFR to common stock and excludes the common issued when preferred converts. A ROFR in the stock purchase agreements doesn't have this problem, because it covers only the shares sold under each agreement.

Second, notice and timing. Delaware's Section 202 lets the bylaws restrict transfers, but the restriction can be enforced against a buyer who didn't know about it only if it is noted conspicuously on the stock certificate or, for uncertificated shares, in the notice the company must send the holder after the shares are issued. Section 202 also says a new restriction doesn't bind shares already issued unless their holders agreed to it or voted for it, so a ROFR added to the bylaws after formation may not reach earlier shares.

How do the founder ROFR and the investor ROFR fit together?

They overlap. After a priced round, the founders' shares are subject to the ROFR in their stock purchase agreements and the investor agreement, plus any bylaws ROFR, each with its own notice and deadlines. The NVCA agreement flags the overlap. Its optional language lets the agreement's process control over an earlier ROFR in a stockholder's own stock agreement, and lets a bylaws ROFR control over the agreement's company ROFR, so that following the bylaws counts as compliance. Its drafting notes also suggest amending the bylaws to exempt any transfer the agreement covers.

Pick one, and write it into the closing documents. A founder selling shares should send one notice and run one clock: the company decides first, then the investors, then co-sale. Match the exemptions too, so a transfer to a family trust that the investor agreement permits isn't still blocked by an earlier ROFR.

Who is bound by it?

For the investor ROFR, the stockholders who sign the agreement as key holders: usually the founders and other significant common holders. The NVCA model agreement doesn't cover the investors' preferred stock or the common they receive when it converts, though some deals extend it to the investors' shares. A company ROFR in a stock purchase agreement binds the founder or employee who signed it and anyone who later takes the shares from them, subject to the Section 202 legend rule above. Read your own documents to see who is covered.

How does the process work?

1. Notice. The stockholder who wants to sell sends written notice with the buyer, price and terms.
2. The company decides. It usually has 15 to 30 days to buy some or all of the shares on the same terms.
3. Other rights holders decide. Whatever the company doesn't take, stockholders with the secondary right can buy, usually pro rata, and they can often take more if others pass.
4. Co-sale. Holders who don't buy may instead be able to sell some of their own shares to the buyer alongside the seller.
5. The sale closes, but only to the named buyer, at the same or a higher price, and within a set window (often 45 to 120 days). Change the terms or miss the window, and the process starts over.

What is a co-sale (tag-along) right?

Instead of buying the seller's shares, a stockholder with a co-sale right can sell a proportional piece of their own shares to the same buyer, on the same terms. It keeps one stockholder from cashing out alone. For example, say a stockholder holding 60% of the covered shares wants to sell 9,000 shares, and a stockholder holding 30% uses a co-sale right. They split the sale 60:30, so the seller sells 6,000 shares and the co-sale holder sells 3,000.

What transfers are exempt?

Standard exemptions include:

• Transfers to a family member or trust for estate planning
• Transfers to an affiliate, such as an investor's related fund
• Transfers on death
• Repurchases by the company, for example of unvested shares
• Sometimes a small annual carve-out

Exempt transfers still usually need a transfer notice and a joinder, so the new holder is bound by the same agreements, and often board approval.

When does the ROFR end?

Most ROFR and co-sale agreements end automatically at an IPO or a sale of the company. The founder ROFR usually ends at an IPO, or when the company merges into a public company. After that, the only limits on reselling come from securities law and any lock-up.

Does a ROFR let investors block a sale of the company?

No. A ROFR applies when an individual stockholder sells their own shares. Standard ROFR provisions expressly exclude a merger or sale of the company. A sale of the company is governed by board approval, the stockholder vote, the preferred's protective provisions and the drag-along. See Drag-Along Rights and What Are Protective Provisions?

Can I negotiate the ROFR?

Rarely out of a priced round. It's a standard term. What you can negotiate:

• The exemptions: estate planning, affiliates, and a small annual carve-out
• Keeping the company first in priority
• Who is bound, so the agreement reaches only meaningful stakes
• Short, firm deadlines, so a proposed sale isn't held up for months

Related: Pro Rata Rights · What Happens to Startup Stock When You Leave the Company · Series Seed RoundGo deeper: For a full walkthrough, see our Founder Guide to Series A.

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