Financial Glossary
Right of First Refusal (ROFR)
A right of first refusal (ROFR) is a contractual provision granting a designated party the right to match any third-party offer before the asset owner can consummate a sale or transaction with that third party. It differs from a right of first offer (ROFO), where the holder proposes terms first before the owner solicits outside buyers. ROFR is common in startup cap tables (existing investors have the right to purchase shares before a founding shareholder sells to an outsider), real estate transactions (a tenant can match a purchase offer before the owner sells to a third party), and private equity co-investment agreements. The ROFR holder typically has a defined window -- often 20 to 30 days -- in which to exercise the right after receiving notice of the third-party offer.
Problem & Application
A venture-backed startup's investor agreements include a ROFR granting each investor the right to purchase shares if a founding shareholder wants to sell on the secondary market. A founder receives an offer from a secondary market buyer to purchase 500,000 shares at $8 per share ($4M total). Under the ROFR, the founder must notify each ROFR-holding investor of the offer terms. Each investor then has 20 days to elect whether to purchase their pro-rata allocation of the 500,000 shares at $8. If all investors waive the ROFR, the founder may proceed with the secondary sale. If one investor exercises for their 100,000-share pro-rata portion and others waive, the founder sells 100,000 shares to the investor and 400,000 to the secondary buyer. From a cap table management perspective, ROFR exercises and waivers must be documented carefully to avoid disputes and maintain a clean ownership record. A fractional CFO or startup attorney manages this process during secondary transactions to ensure compliance with the shareholder agreement and accurate Carta updates.
In Short
ROFR is a useful mechanism for ensuring priority in business transactions, but it requires careful management to avoid limiting future opportunities.