A right of first refusal is a contractual right that gives the holder — typically the company and/or investors — the opportunity to purchase shares before they are sold to any third party. In startup equity documents, ROFR provisions appear most commonly in the Right of First Refusal and Co-Sale Agreement (ROFR/Co-Sale) and sometimes in the Investor Rights Agreement (IRA) or directly in the stock purchase agreement.
In my practice, founders and employees are often surprised to discover how many of their equity documents contain ROFR provisions — and how much they vary between documents. The most common home for the ROFR in a venture-backed company is the Right of First Refusal and Co-Sale Agreement, which is typically signed at Series A and updated at each subsequent financing round. This agreement gives the company a primary ROFR and gives investors (above certain ownership thresholds) a secondary ROFR on shares the company declines to purchase. Some Investor Rights Agreements also contain ROFR provisions. Earlier-stage companies may embed ROFR rights directly in their stock purchase agreements or certificate of incorporation. If you are not sure whether your shares are subject to a ROFR, the answer is to read all of the equity documents you signed — every page — and look for sections titled "Right of First Refusal," "Transfer Restrictions," or "Restrictions on Transfer." I typically advise founders to do this exercise before they start any secondary sale process, because discovering a ROFR provision after you have found a buyer and negotiated a price creates significant complications and often damages the relationship with the buyer.
When you find a buyer and agree on price and terms, you must deliver a written ROFR notice to the company (and investors if applicable) describing the transaction. The ROFR holders then have a specified period — typically 30 to 60 days — to exercise or waive the right. If they exercise, they purchase your shares at the negotiated price and the third-party buyer is out. If they waive, the sale proceeds to the third party.
The ROFR process follows a defined sequence in most shareholder agreements, and I've seen transactions derailed by sellers who didn't follow it precisely. Here is how the mechanics typically work in a well-drafted ROFR provision. First, the seller finds a buyer and negotiates price and other material terms — number of shares, price per share, payment structure, and any conditions. Second, the seller delivers a written ROFR notice to the company (and to the investors with ROFR rights, if applicable) that includes all of the material terms of the proposed transaction. The notice must be complete and accurate; omissions or inaccuracies can invalidate the ROFR trigger or give the company grounds to challenge the transaction later. Third, the ROFR holders have their exercise window — commonly 30 days for the company and an additional 15 to 30 days for investors — to decide whether to exercise. During this period, the seller cannot close with the third-party buyer. Fourth, if the ROFR is exercised, the ROFR holder and the seller execute a purchase agreement on the terms stated in the notice, and the third-party buyer has no claim to the transaction. If the ROFR is waived (typically by a written waiver letter from the company and any investors with ROFR rights), the seller may close with the third-party buyer, subject to any remaining consent requirements. In my experience, the most common practical issue is the timing: third-party buyers frequently lose patience during the ROFR exercise window, particularly when the window is long or when the ROFR process extends across multiple investor groups.
Yes. Dual-ROFR structures — in which the company has a primary right and the company's investors share a secondary right — are common in venture-backed startups. In a dual-ROFR structure, the company reviews the proposed transaction first; if it declines to purchase the full block of shares, the remaining shares are offered to investors in proportion to their ownership.
The dual-ROFR structure is one of the defining features of venture-backed company equity documents, and understanding it is essential for secondary sale planning. Here is how it typically works. The company holds the primary ROFR, meaning it has the first right to purchase the entire block of shares the seller proposes to transfer. If the company elects to purchase all of the shares, the process ends there. If the company declines to purchase some or all of the shares, the remaining shares are offered to the investors with ROFR rights — typically the major investors (Series A and later preferred holders above an ownership threshold). The investors can then exercise proportionally or assign their rights among themselves. In practice, the dual-ROFR process can take 60 to 90 days or more when it must run through multiple investor groups, each of which may need to consult with its own investment committee before deciding whether to exercise. I typically advise founders to build this timeline into any secondary sale plan and to set expectations clearly with third-party buyers about the likely ROFR process duration. An experienced secondary buyer — such as an institutional fund that regularly purchases pre-IPO equity — will be familiar with this process and build the timeline into their offer. An unsophisticated individual buyer may not be, and that mismatch creates risk.
Yes. If the company exercises its ROFR, it steps into the buyer's shoes and purchases your shares at the price and on the terms you negotiated with the third party. You receive the same consideration you would have received from the third-party buyer. The company cannot exercise the ROFR and then change the price.
One of the most common misconceptions I encounter is that a company exercising its ROFR means the seller doesn't get paid, or gets paid less. That is not how the ROFR works. The entire logic of the right of first refusal is that the company is stepping in on the exact same terms as the third-party buyer — same price, same payment structure, same closing timeline. If you negotiated $50 per share with a third-party buyer, the company pays $50 per share if it exercises. The company cannot exercise the ROFR and then refuse to close, or try to negotiate a lower price. If it exercises, it is contractually committed to purchase on the terms stated in the ROFR notice. That said, there are a few practical complications worth understanding. First, the company may not have the cash to close at the time it exercises. Most ROFR provisions require the company to close within a specified period after exercising (often 30 to 60 days), but a cash-constrained company may struggle to do so. Second, "deemed transfer" clauses in some agreements expand the ROFR to cover indirect transfers — for example, if you transfer your shares to a holding entity that you then sell, the transfer of the holding entity may be deemed a transfer of the shares for ROFR purposes. Founders who try to structure around the ROFR through holding entities should have counsel review whether deemed transfer provisions apply.
Companies — particularly high-value private companies — use ROFR and transfer restrictions strategically to prevent unauthorized shareholders from accumulating positions, to maintain control over their cap table ahead of a future financing round or IPO, and to block buyers they view as hostile or problematic. High-profile AI companies including Anthropic and OpenAI are known to actively enforce their transfer restrictions to manage secondary market activity in their shares.
In my experience, the most sophisticated company counsel I work with treat the ROFR not as a passive default but as an active cap table management tool. For hot companies — particularly in AI — secondary demand is intense, and uncontrolled secondary sales can result in unwanted shareholders, complicated cap tables, and strategic information getting into the wrong hands. Companies at the caliber of Anthropic and OpenAI have been public about the fact that they enforce their transfer restrictions to control who owns their equity. The mechanisms for this are several. First, the company can simply exercise the ROFR whenever a secondary sale is proposed at a price it is willing to pay — this has the effect of keeping the cap table clean and preventing third-party buyers from accumulating positions. Second, even when the company waives the ROFR, it retains consent rights over the proposed buyer and can reject buyers it finds objectionable. Third, some companies have adopted "deemed transfer" clauses and restrictions on transfers to funds or entities that hold shares for multiple beneficial owners — provisions that limit the ability of secondary platforms to aggregate demand through special purpose vehicles. I typically advise founders who want genuine secondary liquidity to have an honest early conversation with the company about whether there is a path to liquidity and under what conditions the company would facilitate or consent to a transaction. Companies that are actively managing their shareholder base may be willing to work with founders who approach the conversation cooperatively, but may be hostile to transactions that are structured without advance notice or that attempt to circumvent their transfer restrictions.
The most important ROFR negotiating points are: the length of the exercise window (shorter is better for sellers), whether the ROFR applies to transfers to family trusts or estate planning entities (seek an exemption), whether there is a minimum transaction size below which the ROFR doesn't apply, and whether the ROFR can be waived by the company at its discretion on a pre-approved basis for specific transaction types.
Most founders sign their initial equity documents without much attention to the ROFR provisions, and by the time they want to sell, the terms are set. But for founders who are in a position to negotiate — particularly at initial company formation or at Series A — there are a few provisions that are worth pushing for. First, the exercise window: a 30-day window is more seller-friendly than a 60-day window, because it reduces the period during which a third-party buyer must remain committed. Shorter windows are more negotiable at earlier stages. Second, family trust and estate planning exemptions: most standard ROFR provisions exempt transfers to revocable living trusts controlled by the transferor, transfers to family members for estate planning purposes, and transfers between entities under the founder's control. These exemptions should be explicit and broad. Third, de minimis thresholds: some ROFR provisions apply only to transfers above a specified number of shares — a provision that gives founders flexibility for smaller liquidity transactions without triggering the full ROFR process. Fourth, blanket waiver for company-approved transactions: some agreements allow the company to pre-approve categories of secondary transactions (for example, sales through a specific platform in a specific price range), with the ROFR deemed waived for such transactions. This kind of provision can significantly reduce the friction of secondary sales for founders who want recurring liquidity. I've been able to negotiate these provisions in early-stage company documents — they are easier to obtain when the relationship between founders and investors is new and collaborative, and much harder to retrofit into existing agreements once the company is well-established and the investors hold more leverage.
In my experience, the ROFR is rarely the deal-killer founders fear it will be — but it does shape the transaction in ways that require planning. The founders who navigate secondary sales most successfully are the ones who understand the ROFR mechanics before they start, communicate with their company early and transparently, and set realistic expectations with their buyers about the process and timeline. The founders who struggle are the ones who treat the ROFR as an obstacle to work around rather than a process to manage.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises startups, founders, and investors on SAFE financings, venture capital rounds, mergers and acquisitions, acquihires, and IPOs. He has represented clients in hundreds of transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology. Prior to his career as a corporate lawyer and transaction advisor, he served with the U.S. Department of Justice and as an international and cross-border tax advisor at a Big 4 accounting firm.