Secondaries Explained

Reference · Rights & restrictions

ROFR (right of first refusal)

Before a seller can transfer shares to an outside buyer, the company (and sometimes existing major investors) must be offered the chance to buy the shares themselves, on the same terms.

Worked example

A worked example of a ROFR partially killing a deal (illustrative figures):

  1. A seller and an outside buyer agree on $10/share for 5,000 shares — a $50,000 deal — and submit it to the company for the standard 30-day ROFR review window.
  2. The company doesn't want an unfamiliar outside investor on its cap table, but also doesn't want to spend the full $50,000. It exercises its ROFR for half the block: 2,500 shares, at the same $10/share, for $25,000.
  3. The outside buyer ends up with only 2,500 shares instead of the 5,000 they originally agreed to buy — the ROFR didn't block the deal outright, but it resized it without either the buyer or seller having a say.
  4. This is why sophisticated secondary buyers price in ROFR risk before agreeing to terms — a company's ROFR exercise history (does it usually waive, partially exercise, or fully exercise?) is a real underwriting input, not a formality.

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