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What is ROFO and ROFR?

A. ROFO

What does ROFO mean?

‘Right of First Offer’ means a condition imposed on the investor wherein, if the investor intends to sell the shares held by him to a third-party, the investor would be obligated to make an offer to the Founder and/ or other investors to buy the shares. 

How are these conditions imposed?

Under this clause, if the investor finds any external buyer of the shares owned by him, before making any offer to such external buyer, the investor will first approach the Founder and/ or other investors. 

This enables the Founder to get an opportunity to retain control of the company if he does not want any other external parties to become a shareholder of the company.

If the Founder/ other investors do not agree to the Offer Price or the investor identifies any third-party who is ready to buy the shares at a price higher than the Offer Price, the investor will have the right to sell the shares to such third-party. 

B. ROFR

What does ROFR mean?

‘Right of First Refusal’ means a condition imposed on other investors and Founders wherein, if the Founder or other investors intend to sell the shares to a third-party, the Founder or other investors would be obligated to make an offer to the investor to buy the shares. 

How are these conditions imposed?

Similar to ROFO, the Founder will have to first approach the investor and take his consent on whether he wants to buy the shares or not. The investor will have a right but not an obligation to buy such shares. 

If the investor does not respond within a timeline defined in the Offer Letter, the Founder will have the right to sell the shares to the identified third-party. 

This post is part of our Founder’s handbook – “Negotiating Shareholder’s Agreement”, a comprehensive handbook for founders to negotiate shareholder’s agreement. Click here to download the complete handbook.

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