Right of first refusal (ROFR)

A Right of First Refusal (ROFR) is a transfer restriction that requires a selling shareholder — typically a founder exiting early or an early investor seeking a secondary sale — to first offer their shares to existing shareholders (usually investors) on the same terms as the third-party offer before completing the sale. Only if the existing shareholders decline to exercise their ROFR can the seller proceed with the external buyer.

ROFR serves two purposes for investors. It prevents unwanted third parties from becoming shareholders, and it gives investors the opportunity to buy shares at the same price a willing external buyer has offered, effectively providing a market-validated acquisition at no negotiation disadvantage.

In Indian SHAs, ROFR is almost universally included. The mechanics typically give existing shareholders 15–30 days to exercise the right after receiving notice of a proposed transfer, the price, and the identity of the proposed buyer. If multiple shareholders hold ROFR, the entitlement is usually pro-rata to their existing holdings, with a right to over-subscribe if others decline.

For founders, ROFR can complicate early secondary sales — for example, selling shares to an angel to generate personal liquidity. If investors exercise ROFR, the external buyer is shut out, which can discourage potential buyers from investing time in due diligence on a secondary transaction. Founders seeking secondary liquidity should check the ROFR mechanics and waiver provisions in their SHA carefully.