What is a right of first refusal (ROFR) and how does it affect secondary sales?
Short Answer
ROFR gives the company or other shareholders the right to purchase shares before a shareholder can sell them to an external buyer, preserving cap table control.
Full Explanation
If an early investor wants to sell their shares to a secondary buyer, ROFR gives the company (typically) and/or other shareholders the right to match the offer. For example: a Series A investor receives a £2M offer from a secondary fund for their stake. Company and other investors have the right to purchase those shares at the same £2M price before the external sale closes. ROFR serves two purposes: prevents cap table fragmentation (adding new minority shareholders) and prevents hostile parties from acquiring stakes. From the company's perspective, ROFR is critical because early shareholders might otherwise sell to competitors or activist investors. From the early investor's perspective, ROFR is standard but negotiable: some investors push for ROFR only by the company (not co-shareholders) to enable secondary liquidity. The mechanics matter: ROFR typically gives the company 20-30 days to decide whether to exercise. If the company declines, other shareholders can exercise. If all decline, the sale proceeds. ROFR is universal in Series A and later; rare in seed/angel rounds.
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