Know the ROFO Clause in Funding Agreement

Start-up Section I Know the ROFO Clause in Funding Agreement

Having the right blend of contract clauses is critical while accepting funding from the investors. It reduces the risks to founders and the Company and provides legal rights in case of a future dispute. It calls for understanding the critical clauses while drafting an investor agreement. In this article, we explain the ROFO clause, which attracts the most heated debates in the angel funding rounds!

A ROFO (Right of First Offer) provides the promoters with a right to purchase the shares from the investors before they propose to transfer their shareholding to a third party. The shares that are offered to the promoters are at the same price, payment and other terms and conditions that are applicable to the proposed third person transferee. Under ROFO clause if the promoter rejects the offer, the investor can then sell it to a third party. If the attempts at selling to a third party are unsuccessful, the investor can come back to the right holder (founder) for a new offer. At this point, the right holder is not bound by their original offer.

Start-up Section I Know the ROFO Clause in Funding Agreement

ROFO gives the privilege to the promoter to purchase the Company’s shares from the investors before they are being offered to any third party. This would ensure that investors do not sell a shareholding of the Company to the competitor and in a way protect the interest of the founders.

Key Takeaways:

  • A right of first offer says that a rights holder can buy or bid on an asset before the owner tries to sell it to a third party.
  • These rights are common with real estate and business sales and are often written into the lease agreement or business partnership.
  • Right holders are usually either tenants or investors as the intention of the right is to minimize property or business disruption.
  • A right of first refusal, different from a right of first offer, gives the right holder the option to match an offer already received by the seller.
  • A right of first offer is said to favor the seller, while a right of first refusal favors the buyer.

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