What You Need to Know About ROFR

The secondary market has opened up a deluge of opportunities for employees of private companies who want access to liquidity. By liquidating their shares, employees can buy a home or pay for an education.

However, getting liquidity could take longer if the company they work for decides to exercise its Right of First Refusal or ROFR.

ROFR gives companies the right to accept or refuse an offer by an employee who wants to liquidate their shares after that employee has an offer from a third-party buyer.

Right of First Refusal should not be confused with Right of First Offer (ROFO) which gives companies or shareholders the right to be offered the shares before any external solicitation takes place. If the company refuses the offer, then the employee can sell their shares to a third party with the same terms.

ROFR or ROFO can seem like a hurdle for employees looking for liquidity. However, it’s used for a good reason. Companies don’t exercise ROFR to keep employees from accessing their liquidity. It’s used to ensure that the company can maintain control of its cap table and vet any new investors in their company.

How to Tackle ROFR — Before or After

If employees anticipate that their startup will use their ROFR rights, then the employee can attempt to negotiate ROFR prior to the sale of the shares.

Employees can discuss their options for selling their shares with an executive at the company — such the chief legal officer or another executive in the legal department who can offer a frank assessment of the situation.  

“If you can convince [the executive] then they can be your advocate in front of the CEO, CFO, COO or board who must approve these things,” writes Gil Silberman, Chief Legal Officer at Forge, in a Quora post.

Silberman continues to explain in his post that employees consider the following factors when negotiating ROFR:

  • Why do you want to sell the shares, at what price, and on what terms?
  • Who is the proposed purchaser? Is it a friend or relative? A business associate? An existing shareholder? A major investor in the company?
  • Does the company actually intend to exercise the right of first refusal, and if so, why — is the price low enough that they consider it a good deal? Are they just trying to block the sale? Do they want to avoid having too many owners, or unknown owners? Is there some reason they mistrust the potential purchaser?
  • Are there other parties with secondary rights of refusal, or who the company has formally or informally promised to assign refusal rights, e.g., its preferred investors?

If the company wants to keep control of its cap table, then explain how the third-party buyer is worthy of investing in the company — they’re trustworthy, well-known or have a relationship with the startup, or will not resell the shares.

“To go even farther, the buyer could offer to waive information rights, proxy their vote to a company representative, promise to keep everything confidential,” according to Silberman.

Advocate for an Employee Liquidity Program

Another option to help companies provide liquidity to their employees and keep control of their cap table is to facilitate an employee liquidity program.

Employee liquidity programs allow companies to administer their own secondary liquidity event for employees or early investors. What’s more, liquidity programs help startups avoid spending funding on ROFR exercises and protects voting and information rights.

The programs can take the form of a buyback or redemption program and allows employees to access the funds they want while giving companies the control need to ensure a stable financial destiny.

For more information on how Forge works with shareholders and companies to access liquidity visit Forge.com.