ROFR vs ROFO: Right of First Refusal vs Right of First Offer

Right of First Refusal (ROFR) allows shareholders to match third-party purchase offers after they're received, while Right of First Offer (ROFO) requires sellers to offer shares to designated holders before seeking outside buyers. Both mechanisms protect existing shareholders from unwanted ownership changes, but they operate at different stages of the transaction process.

Understanding ROFR and ROFO

ROFR operates reactively—it's triggered when a seller receives a legitimate third-party offer. The right holder then has 15-30 days to decide whether to purchase on identical terms or decline. If they decline, the sale proceeds with the original buyer.

ROFO operates proactively—sellers cannot approach external buyers until offering shares to right holders first. The right holder typically has 20-45 days to accept. Only if they decline can the seller market shares to third parties.

Key Differences at a Glance

How Each Works in Practice

ROFR Example: Employee Secondary Sale

Scenario: An early-stage company employee wants to sell 10,000 shares to an angel investor.

Process:

1. Employee locates angel investor offering $5 per share ($50,000 total)
2. Employee notifies the company per shareholders agreement
3. Company receives full offer terms and has 20 days to decide
4. Company exercises ROFR and purchases all 10,000 shares at $5 per share
5. Angel investor doesn't participate; transaction completes within 30 days

Outcome: The employee gets market pricing but loses negotiating leverage. The company maintains control and prevents outside investor involvement. This is common with secondary market platforms like CartaX where ROFR processes are systematized.

ROFO Example: Venture Capital Fund Liquidity

Scenario: A venture capital firm wants to sell a 5% stake (500,000 shares) in a late-stage startup.

Process:

1. VC proposes sale at $20 per share ($10M) to co-investors with ROFO rights
2. Co-investors have 30 days to evaluate the opportunity
3. Two other VCs each purchase 250,000 shares at the proposed price
4. Original selling VC completes entire transaction internally
5. No secondary market sale occurs; proceeds distributed 30 days later

Outcome: The selling VC gets desired liquidity at target price. Co-investors increase their stakes before any external competition. Transaction never reaches secondary markets.

Practical Applications Across Industries

Venture Capital (ROFR Dominance)

Approximately 85-90% of venture capital term sheets use ROFR rather than ROFO. This reflects the venture ecosystem's balance between investor control and employee liquidity needs.

Typical VC ROFR Structure:

• Company holds primary ROFR on all common stock sales
• Preferred investors hold secondary ROFR after company waives
• Response period: 20-30 days from notice
• Minimum threshold: Often $25,000-$50,000 (small transfers exempt)
• Multiple holders split purchases pro-rata by ownership percentage

Secondary market platforms systematized ROFR processes, making them efficient and predictable—companies get notified 30 days before listing, have 20-25 days to exercise, and remaining shares list to qualified buyers if declined.

Real Estate Partnerships (ROFO Standard)

Real estate partnerships typically use ROFO rather than ROFR because property sales involve longer due diligence periods and properties rarely have immediate third-party offers ready.

Typical Real Estate ROFO Structure:

• Partner wanting to sell must offer to other partners first
• Response period: 30-60 days for property evaluation
• Price determination: Independent appraisal or seller's proposed price
• Terms: Cash at appraised value with 60-90 day closing

Real estate's longer transaction cycles and illiquidity make ROFO's front-loaded process more practical than ROFR's reactive approach.

Private Equity Funds (ROFO Standard)

Private equity fund agreements almost universally include ROFO provisions for limited partner interest transfers. General partners need advance notice to evaluate any new LPs before they join the fund.

Standard PE Fund ROFO Terms:

• LP must notify GP of intent to transfer interest
• GP has first right to find replacement LP at proposed price
• Response period: 45-60 days for GP evaluation
• Approval rights: GP can reject transfers even after ROFO expires

This structure protects fund dynamics by preventing inappropriate investors from entering through secondary transfers.

Advantages and Key Considerations

ROFR Benefits and Limitations

Benefits:

• Market-driven pricing ensures fair value without disputes
• Reactive nature means no advance warning burden on sellers
• Shorter response periods (15-30 days) speed transactions
• Lower administrative overhead
• Easier for sellers to initiate liquidity events

Limitations:

• Third-party buyers often demand breakup fees or ROFR waivers
• Matching requirement eliminates negotiation discounts
• Limited control over which buyers make initial offers

ROFO Benefits and Limitations

Benefits:

• Proactive control prevents unwanted outside marketing
• Right holders get first negotiation opportunity
• Stronger protection against dilution
• Prevents competitive bidding that inflates prices
• Can negotiate terms in some agreements

Limitations:

• Significant delays (30-60+ days before market access)
• Pricing disputes without market validation
• Deters sellers from initiating liquidity events
• Complex administration and compliance tracking
• May require independent appraisals for disputes

Strategic Negotiation Guidance

Founders/Sellers Should Prefer:

• ROFR in growth scenarios requiring employee liquidity
• Shorter response periods (15-20 days)
• Clear waiver procedures for small transactions
• Minimum transaction thresholds before rights trigger

Investors/Right Holders Should Prefer:

• ROFO in early-stage investments with concentrated ownership
• Longer response periods (30-45 days)
• Fair market value determination procedures
• Broad coverage including all equity transfer types

Common Disputes and Enforcement

Notice and Timing Issues

The most frequent ROFR/ROFO disputes involve inadequate notice to right holders. Sellers may provide incomplete information, miss deadlines, or deliver to incorrect addresses.

Consequences:

• Response period doesn't begin until proper notice occurs
• Attempted sales without notice are void or voidable
• Right holders may seek injunctive relief to block closing
• Courts typically require strict compliance with notice provisions

Multiple Right Holder Allocation

When multiple parties hold ROFR or ROFO rights, agreements specify allocation methods:

Most venture agreements use pro-rata with over-subscription, letting non-participating holders' allocation transfer to those wanting additional shares.

Frequently Asked Questions

Which right is stronger, ROFR or ROFO?

ROFO provides stronger protection by giving right holders the first opportunity to purchase shares before any market competition. ROFR only protects against specific third-party offers already in progress. However, ROFO restricts seller flexibility more significantly.

Can agreements include both ROFR and ROFO?

Yes. The typical structure requires sellers to offer shares under ROFO first. If declined, any subsequent third-party offers trigger ROFR rights. This dual-protection approach maximizes control but extends timelines 45-60 days and significantly restricts seller flexibility.

Do ROFR rights ever expire?

ROFR rights typically continue until specific termination events occur: company IPO, acquisition, dissolution, or mutual written agreement. Some agreements include sunset provisions terminating rights after 7-10 years. Rights also terminate when the right holder's ownership drops below specified thresholds (5% or 10%).

How do these provisions affect company valuation?

ROFR provisions create 10-20% valuation discounts for minority shareholders because restricted shares have lower liquidity and longer sale timelines. However, majority shareholders and control investors may see neutral or positive impacts because ROFR protects their control positions.

What if the offered price seems too low (ROFO)?

Most ROFO agreements include fair market value requirements with independent appraisal provisions. If the seller's proposed price appears unfair, either party can demand appraisal by a neutral expert. If appraisals differ by more than 10-15%, appraisers select a third neutral appraiser whose value determines the price.

Key Takeaway

ROFR and ROFO address the same core objective—protecting existing shareholders from unwanted ownership changes—but through fundamentally different mechanisms. ROFR works best in liquid, high-growth environments where market transactions naturally occur. ROFO works best in closely-held entities where control and internal ownership matter more than transaction flexibility. Understanding these differences is critical when negotiating shareholder agreements, term sheets, and secondary sale opportunities.