A contractual provision that grants certain parties (typically the company and large investors) the option, but not the obligation, to purchase shares from existing shareholders before they can be sold to an external party. ROFRs are commonly found in venture financing deals and serve to protect the interests of investors and maintain control over ownership.

Purpose

VCs often request ROFRs to safeguard their ownership percentages in their portfolio companies and potentially increase their control over time. It also allows them to have a say in who joins the company's shareholder base. ROFRs are frequently paired with co-sale rights, enabling investors to participate in the sale or liquidation of the company on equal terms as other parties.

How it Works

If a ROFR is present, and a shareholder receives an offer to sell their shares, they are obligated to present the offer to all ROFR holders (again, usually the company and its larger investors) before pursuing the offer. The holders then have a specified period to decide whether to match the offer and purchase the shares or pass on the opportunity. If multiple ROFR holders choose to participate, they usually have the right to buy the shares on a pro-rata basis. If no ROFR holders exercise their rights, the shareholder can generally proceed with the third-party offer.

Right of First Offer (ROFO) as an Alternative

A Right of First Offer grants the holders the right to make an offer for the selling shareholder's stake before they can seek third-party offers. If the ROFO holders decline to make an offer or the selling shareholder rejects their offer, the shareholder is free to solicit offers from external parties.

In Summary

ROFR provisions are common in VC deals, but the specifics can vary significantly. It is crucial for all parties involved to comprehend the implications and differences between various ROFR clauses in order to make informed decisions.