When drafting a shareholders’ agreement, one clause that often sparks intense negotiation is the one dealing with share transfers. Founders want to maintain control, early investors want to secure their position, and incoming investors seek flexibility. This is where two important legal tools come into play i.e. the Right of First Refusal (“ROFR”) and the Right of First Offer (“ROFO”).
At first glance, they may sound similar. Both mechanisms give existing shareholders a chance to buy shares before they are offered to outsiders. But the way each right operates and the impact it can have on a company’s ownership structure, deal flow, and investor confidence can be significantly different.
Let’s break down what these rights mean, how they work, and which one might be the better fit for your company.
What Is a Right of First Refusal (ROFR)?
A Right of First Refusal is, in simple terms, a reactive right. It allows existing shareholders to step in and purchase shares that another shareholder intends to sell — but only AFTER that shareholder has found a willing third-party buyer.
Imagine a situation where Shareholder A finds an outside investor, Investor X, who’s willing to buy their shares at a certain price. Before that deal can close, Shareholder A must give the same offer to the existing shareholders. If one of them wants to match the terms, they get to buy the shares instead of Investor X. If no one steps up, the deal with the third party can proceed.
ROFR gives internal shareholders the final say. It acts as a gatekeeper mechanism, ensuring that new entrants into the company don’t disrupt the ownership balance unless no one internally is willing to buy.
This blog is a part of our Mergers and Acquisitions Services and The Essential Guide to Shareholders’ Agreements blogpost.
What Is a Right of First Offer (ROFO)?
A Right of First Offer flips the sequence. Here, when a shareholder decides to sell, they are required to first approach the existing shareholders BEFORE seeking any external buyers. The seller proposes the price and terms upfront, and internal shareholders get a chance to negotiate and buy. Only if no agreement is reached can the seller, then go to the external market.
This gives existing shareholders the initial opportunity to purchase the shares without the pressure of matching an external offer. However, it also means the seller has less market information when proposing terms, and the price may not reflect the true market value.
The Practical Difference Between ROFR and ROFO
The real difference between ROFR and ROFO comes down to timing and who holds the upper hand. With a ROFR, the seller gets to shop around first as they can strike a deal with an outside buyer and then turn to the existing shareholders to see if anyone wants to match it. That gives the seller a strong position to negotiate from. But there’s a catch; outside buyers might feel like they’re just being used to set the bar for someone else to jump in. And understandably so as no one likes being the fallback option in a deal.
With a ROFO, the seller starts with internal shareholders, without external benchmarks. This benefits existing shareholders but can limit the seller’s ability to get the best price or terms.
Another critical aspect is deal momentum. ROFR can delay transactions especially if shareholders need time to evaluate and match an offer. ROFO tends to be quicker in practice because once internal negotiations are done and the path to market is clearer.
What Works Best in Practice?
The answer depends on who you are in the deal. If you’re a founder or an early-stage shareholder looking for liquidity, ROFO might be more appealing. It allows for cleaner, faster exits and doesn’t scare off potential buyers who might otherwise walk away from deals vulnerable to matching rights.
If you’re an institutional investor, a VC, or a strategic shareholder aiming to protect your position and avoid unwanted dilution, ROFR is typically preferred. It ensures you always have the opportunity to step in and maintain your stake, even when compelling external offers arise.
That said, in many shareholders’ agreements, we see a hybrid approach wherein sometimes the right kicks off with a ROFO and escalating to a ROFR if the offer is not accepted within a defined period. This offers a balance since internal shareholders get the first chance, and the seller still has a path to market-tested pricing.
What Should You Choose for Your Company?
There’s no universal answer. Each clause must be tailored to your company’s stage, shareholder composition, and long-term strategy.
For early-stage companies looking to raise capital, overly restrictive transfer rights can make your cap table unattractive. On the other hand, companies with complex shareholder structures or strategic investors may benefit from stronger control mechanisms to manage who joins the shareholder base.
Final Thoughts
Share transfer restrictions are not just about legal drafting but also about how they’re about shaping the future of your company. ROFR and ROFO each have strategic value, but their success depends on how well they’re adapted to your company’s context.
Carefully crafted clauses can help preserve shareholder harmony, enable fair exits, and avoid future disputes. As always, the devil is in the details and a well thought out agreement today can save a lot of trouble tomorrow.
