The right of first offer (ROFO) is a contractual agreement that gives a specific rights holder the opportunity to be the first to make an offer to purchase an asset before the seller offers it on the open market. In the context of start-ups and venture capital, ROFO is often used in relation to company shares or stocks.

Definition and concept:

An ROFO obliges the seller to give the rights holder the opportunity to be the first to submit an offer to purchase the asset before contacting other potential buyers. In contrast to the right of first refusal (ROFR), the seller does not have to disclose an existing offer from a third party in the case of an ROFO.

How it works:

1. the seller informs the ROFO holder of his intention to sell. 2. the ROFO holder has a fixed period to make an offer. (3) If the seller rejects the offer, he may offer the asset on the open market. 4. the seller may sell the asset to a third party on equal or better terms.

Importance for startups and investors:

For investors: – Opportunity to be informed of sale intentions at an early stage – Opportunity to strategically increase own stake in the company – Potential price advantages through right of first offer For start-ups:
– Greater flexibility compared to ROFR
– Opportunity to test the market value of the shares
– Control over the sales process while taking existing investors into account

Comparison with the Right of First Refusal (ROFR):

– ROFO gives the rights holder the opportunity to determine the price – ROFO offers the seller more flexibility and potentially higher sales prices – ROFO can speed up the sales process as there is no need to wait for an external offer

Negotiating points:

1. scope of the ROFO (all or only certain shares) 2. timeframe for submitting an offer 3. minimum requirements for the offer 4. process for rejecting the offer and subsequent sale 5. transferability of the ROFO right

Advantages and disadvantages:

Advantages:
– Early information about the intention to sell – More flexible process for the seller – Possibility of strategic pricing for the ROFO holder Disadvantages:
– Less protection for the rights holder compared to the ROFR
– Potential delays in the sales process
– Possible undervaluation of the asset by the ROFO holder

Legal and practical aspects:

– Careful wording in articles of association and investment agreements – Clear definition of the process and deadlines – Consideration of confidentiality aspects when disclosing intentions to sell – Possible interaction with other contractual clauses (e.g. tag-along rights)

Strategic considerations for start-ups:

1. balancing investor protection and flexibility when selling shares 2. consideration of ROFO in the long-term exit strategy 3. transparent communication with all stakeholders about the ROFO provisions 4. regular review and adjustment of the ROFO clauses to the company’s development

Best practices for investors:

1. realistic pricing when exercising the ROFO 2. quick and professional response to ROFO notifications 3. consideration of the long-term relationship with the startup when exercising the ROFO 4. preparation for various scenarios, including non-exercise of the ROFO

Market trends and developments:

1. increasing use of ROFO as a more flexible alternative to ROFR 2. integration of ROFO into more complex exit rights structures 3. adaptation to new corporate forms and financing models 4. development of standardized ROFO clauses in model contracts

Conclusion:

The right of first offer represents a balanced approach that attempts to harmonize the interests of investors and startups. It offers investors the opportunity to be informed early on about sales intentions and to make potentially advantageous offers, while at the same time giving the startup more flexibility and control over the sales process. For startups, ROFO can be a valuable tool to maintain relationships with existing investors while preserving the opportunity to realize the best market value for their shares. The lower restriction compared to ROFR can also help to make the company more attractive to future investors. Investors should view ROFO as a strategic tool that gives them an information advantage and the opportunity to increase their stake, but also requires careful consideration and quick action. The exercise of ROFO should always be considered in the context of the overall investment strategy and the long-term relationship with the startup. In a dynamic startup ecosystem that constantly presents new challenges and opportunities, ROFO remains a relevant and useful tool for shaping balanced and flexible investment relationships. Careful structuring and application of ROFO clauses can help to create a win-win situation for all parties involved and support the long-term growth and success of the startup.