Right of first refusal

Hey there, startup nation!

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Q1 is in full swing and we know you might be eyeing a new round of fundraising for your venture. Today, we’re getting personal with another investor right you might come across during negotiating a term sheet - the right of first refusal (ROFR). Let’s get started.

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What’s the right of first refusal?

‍ROFR give its holders (investors) “first dibs” on any share sale. So, if the existing shareholders want to sell shares to a third party, investors can beat them to it by matching their offer.

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Why does this matter?

‍For founders and investors alike*, ROFR is crucial because it controls who becomes a shareholder in the company. Using ROFR, existing shareholders can block an entry of a new investor by calling dibs. Typically, they have to match the commercial conditions of the third-party offer. ROFR is a pretty standard provision, but the exact terms can vary from deal to deal.

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On the plus side, ROFR keeps the cap table clean and tight. On the other hand, it can deter potentially attractive investors.

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*In the US or the UK, the company itself has ROFR to control its cap table - this means that all existing shareholders indirectly benefit from it as well.

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Dos and don'ts:

Navigating ROFR right can be tricky, but we’ve got some simple tips to help you.

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In a nutshell

‍ROFR is a powerful tool for startup founders and investors alike, offering control over who gets on cap table. It ensures that both founders and current investors can protect the company's strategic direction and investor base. This is particularly valuable in the fast-moving world of startups, where keeping the ship steady is crucial.

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If you want to chat more about defining and negotiating ROFR clauses, reach out to our team anytime and follow us on LinkedIn for more insights.

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So long!

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