ROFR vs. ROFO in startup share sales

Definition and purpose

In the private market, a ROFR is a contractual provision that gives a company or its investors the first chance to match — or refuse — any third-party offers when another holder wants to sell. The existing investors typically benefit in this scenario. The seller must first secure a bona fide offer from a third party before the ROFR process can begin.

Where it typically appears

A ROFR is often included in shareholder or investor rights agreements. It will spell out who can exercise the ROFR, and how. It’s most common among venture-backed startups.

Definition and purpose

A ROFO is another contractual obligation governing how and when shares of a private company get sold. It gives the company or its investors the right to make the first offer before a seller can shop them around to third parties. This means negotiations will begin internally before outside buyers are brought in. 

This option means less control for the company than a ROFR; if they refuse to purchase the shares, a third party could come into the picture without their approval.

Typical use cases

Like the ROFR, a ROFO is used to protect investors’ interests, while still allowing some flexibility for the seller. A ROFO is often seen in early-stage company agreements.

Sequence of events

Here’s what would happen in a mock ROFR scenario:

1. An employee of Company A negotiates a deal with Company B to purchase 20,000 shares of Company A at $9 per share.
2. The employee sends a ROFR notice to Company A, disclosing the outside buyer’s identity, the exact price, and any special terms. Company A gets the first opportunity to match the deal with Company B. 
3. Company A chooses not to repurchase the shares. The ROFR then goes to Company A’s investors.
4. The lead investor decides to purchase all 20,000 shares at the same $9/share. Company B is cut out of the transaction, and the lead investor has increased their ownership stake.

Here’s a mock ROFO situation:

1. Company A’s founder wants to sell 50,000 shares. Before they can shop the deal, they must submit a ROFO notice to the investor. This includes an offering price of $12 per share.
2. The investor decides to counteroffer at $10.50/share, which Company A’s founder rejects.
3. The founder is now free to shop the shares externally — with limits. They can look for outside buyers, but cannot sell below $12 per share.
4. The founder finds an outside buyer who will purchase the 50,000 shares at $12.50 each. The sale closes, and no further approvals are needed from Company A or its investors, since the ROFO process already gave them the first chance.

Learn how platforms like Augment handle ROFR/ROFO logic and structure SPVs to simplify these steps for both buyers and sellers.

Impact on deal execution speed and certainty

ROFRs can create uncertainty and slow down deal timelines for the seller and a potential third-party buyer, because they must wait to see if the ROFR holder will exercise. But the seller is able to use third-party price discovery to get market-based terms for their asset before approaching the company or its investors.

In an ROFO scenario, a seller must negotiate in the dark, often with limited price transparency. These negotiations can start earlier, but typically require more back-and-forth up front.

It’s important for potential sellers to understand timelines, notice requirements, and approval conditions before initiating either the ROFR or ROFO process. Check for this language in your shareholder agreement.

Sellers should also consider starting conversations with company stakeholders early, either with the company’s lawyers or members of its HR/stock admin team. This startup equity management guide covers other smart practices to prepare for liquidity events, especially when rights or approvals are required.

Using a platform like Augment*, which handles ROFR and ROFO enforcement as part of its transaction process, can help ensure compliance and counterparty coordination.

Informed planning helps employees (and investors) maximize liquidity while staying compliant in these complex deals. With the right platform and structure, liquidity can potentially still be achieved, even in rights-heavy cap tables.