Right of First Offer (ROFO)
A contractual right requiring a shareholder to offer their shares to existing investors before selling to outside parties.
A Right of First Offer (ROFO) gives existing shareholders the opportunity to purchase shares before they are offered to outside buyers. When a shareholder wants to sell, they must first notify the ROFO holders of the price and terms, giving them a window (typically 15-30 days) to match or decline. Only if they decline can the seller approach outside buyers.
ROFOs are common in startup shareholder agreements and serve several purposes. They help existing investors maintain their ownership percentage, prevent unwanted parties from gaining equity, and give the company some control over its cap table. For founders, a ROFO means you cannot freely sell shares on secondary markets without first offering them to your existing investors.
The distinction between ROFO and ROFR (Right of First Refusal) matters. With a ROFO, the seller must come to existing shareholders first. With a ROFR, the seller can negotiate with outside buyers first, but existing shareholders can match the outside offer. ROFOs give existing shareholders more power because they set the initial terms.
Example
A co-founder wants to sell 5% of their shares to a secondary buyer at $10/share. Under the ROFO, they must first offer those shares to existing investors at $10/share. The lead investor exercises the ROFO and buys the shares, preventing the secondary buyer from joining the cap table.
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