Today I’m going to discuss ROFO (Right of First Offer) v/s ROFR (Right of First Refusal) from a negotiation perspective.
Conceptually, both of these are part of transfer restrictions on sale of shares by a shareholder, but the subtle difference is in “price discovery”.
“Seller” = any shareholder of the company who has the right under the shareholders agreement (SHA).
In Right of First Offer, the Seller exercises ROFO to other shareholder(s) and they have to quote a price. If Seller is not happy with the offered price, she can choose to explore other buyers in the market. This gives a benchmark price to the seller for negotiating with other buyers.
However, if Seller already has an external buyer who is buying her stake, other shareholders can exercise their ROFR on this sale. (1) Other shareholders will have to offer same/better price as the external buyer (2) If they make same/better offer, you’re obligated to sell to other shareholders.
Tips for a founder:
- If other shareholders (buyer) are asking for a ROFR on your shares, you (seller) should negotiate for a ROFO instead of ROFR. “Price discovery” will need to be done by other shareholders and you can use that as a benchmark to find other external buyers
- If you’re (buyer) asking for a ROFR/ROFO on shares held by other shareholders (seller), you should negotiate for a ROFR. “Price discovery” will need to be done by the seller with external buyers and you just need to match the price.
- Also you could negotiate that if you exercise ROFR, you’ll buy at lower of Fair Market Value or external buyer price (to protect against any bidding issue) (this is a long shot to agree).
Hope this is an easy to follow negotiation tool. Feel free to share your thoughts.
