ROFR

The Right of First Refusal (ROFR) is a contractual provision — typically in the company's shareholder agreement or the investor's subscription documents — that requires a selling shareholder to first offer their shares to the company (or existing investors) at the same price and terms a third party has agreed to pay.

In practice, ROFR is one of the most important risk factors in pre-IPO secondary transactions. When a buyer and seller agree on a deal, the company has a defined window (commonly 30 days from receiving the transfer notice) to step in and buy those shares itself. If exercised, the third-party buyer receives nothing — they get their due diligence time back and nothing more.

Illustrative example: a fund agrees to buy 100,000 shares from an early employee at $15.00 per share ($1.5M total). The company reviews the transfer notice and decides to exercise ROFR, purchasing those shares itself at the same $15.00 price. The fund's deal is voided; the shares never leave the company's or the employee's immediate orbit.

The edge the pros know: ROFR exercise rates vary enormously by company, price level, and timing relative to an expected IPO. Companies are more likely to exercise ROFR when the secondary price is perceived as a bargain (i.e., below the company's own valuation expectation). Buyers who are paying at a significant premium to the last round price effectively reduce their ROFR risk. Some experienced secondary buyers price a ROFR probability explicitly into their expected return.