Right of First Refusal (ROFR)

A Right of First Refusal (ROFR) gives existing shareholders the right to purchase shares on the same terms that an outside buyer has offered. Unlike a ROFO (where the seller must approach existing shareholders first), a ROFR lets the seller negotiate freely with outside parties but gives insiders the option to step in and match any deal before it closes.

ROFR provisions are standard in startup investment agreements and serve as a gatekeeper for the cap table. They prevent situations where a disgruntled employee sells shares to a competitor, or where shares end up with buyers who might create governance complications. Most VC-backed companies require board approval for any share transfer, with the ROFR as an additional layer.

From a practical standpoint, ROFRs can complicate secondary sales and employee liquidity programs. Outside buyers are often reluctant to invest time negotiating a deal that existing shareholders can simply match. This "chilling effect" is why some companies are moving toward more structured secondary programs that give employees clear pathways to liquidity.