A right of first refusal, or ROFR, lets the company or its investors buy shares that a shareholder proposes to sell before any outside buyer can take them. The right sits in a contract and matches a bona fide third-party offer.

Founders care because a ROFR controls who ends up on the cap table. It keeps shares from drifting to competitors, unwanted parties, or a crowded pool of small outside holders.

How a right of first refusal works

A ROFR is triggered by a proposed sale. A shareholder gets a real offer from an outside buyer and must first bring that offer to the holder of the ROFR. The company usually holds the first-priority right. Investors often hold a secondary right on any shares the company declines.

The ROFR holder can match the offer and buy on the same price and terms. If the holder passes, the shareholder may then sell to the outside buyer, but only on those same terms. A shareholder cannot shop a worse deal internally and a sweeter deal outside.

Right of first refusal versus right of first offer

These two rights are easy to confuse and they are not the same. Under a right of first refusal, the shareholder must find an outside offer first, then give the holder a chance to match it. Under a right of first offer, the shareholder must offer the shares to the holder first, before going to the market at all.

The practical difference is leverage and speed. A ROFR can chill outside bids, because a buyer knows the company may swoop in and match after the buyer did the work. A right of first offer avoids that chilling effect but gives the holder the first look at a price the shareholder sets.

Where the right of first refusal appears

In a venture financing the ROFR usually sits in a combined right of first refusal and co-sale agreement, and it most often applies to transfers of common stock held by founders. It is frequently paired with co-sale rights, so investors can either buy the shares or ride along on the sale. You will see the ROFR flagged in your term sheet before the definitive documents are drafted.

Example: a founder gets an offer from an outside buyer for part of her stock. The company holds a ROFR. It elects to buy those shares itself on the same terms, keeping the stock in-house instead of letting an outsider onto the cap table.

This is general information, not legal advice.