Right of First Refusal (ROFR)

The right of first refusal (ROFR) is a contractual agreement that gives a certain rights holder the opportunity to make an offer to purchase an asset before other potential buyers or to accept an existing offer on the same terms. In the context of start-ups and venture capital, ROFR is often used in relation to company shares or stock.

Definition and concept:

A ROFR obliges the seller to give the rights holder the opportunity to acquire the asset before offering or selling it to a third party. If the rights holder rejects the offer, the seller can sell the asset to a third party, but not on more favorable terms than were offered to the rights holder.

How it works:

1. the seller receives an offer from a third party or wishes to sell.
2. the seller must inform the ROFR holder and disclose the terms of the offer.
3. the ROFR holder has a fixed period to accept the offer under the same conditions.
4. if the ROFR holder refuses, the seller can sell to the third party.

Importance for startups and investors:

For investors:
– Control over the composition of the group of investors
– Opportunity to increase your own stake in the company
– Protection against unwanted dilution or strategic competitors

For start-ups:
– Potential restriction of flexibility in raising capital
– Possible delays in the sales process
– Protection against unwanted shareholders

Variants and related concepts:

1. right of first offer (ROFO): The seller must first make an offer to the rights holder before he can sell to third parties.
2. last look right: Similar to ROFR, but the rights holder can decide after being aware of all other offers.
3. tag-along right: right to sell shares on the same terms as a selling principal shareholder.
4. drag-along right: the right to force other shareholders to co-sell.

Negotiating points:

1. scope of the ROFR (all or only certain shares)
2. time frame for exercising the right
3. information obligations of the seller
4. conditions for the transferability of the ROFR
5. exceptions (e.g. transfers to affiliated companies)

Advantages and disadvantages:

Advantages:
– Control over the ownership structure
– Protection against unwanted shareholders
– Opportunity to strategically expand the share

Disadvantages:
– Potential deterrence of external investors
– Delays in the sales process
– Possible reduction in the achievable sales price

Legal and practical aspects:

– Careful wording in articles of association and investment agreements
– Compliance with antitrust regulations for larger transactions
– Possible conflicts with other contractual clauses (e.g. drag-along rights)
– Consideration of tax implications when exercising the ROFR

Strategic considerations for start-ups:

1. balance between investor protection and flexibility in raising capital
2. planning of exit scenarios taking into account the ROFR
3. transparent communication with all stakeholders about the implications of the ROFR
4. regular review and, if necessary, adjustment of the ROFR provisions in the course of the company’s development

Best practices for investors:

1. clear definition of the conditions and processes for exercising the ROFR
2. consideration of the long-term relationship with the startup and other investors
3. flexibility in handling the ROFR so as not to hinder company growth
4. regular review of the strategic relevance of the ROFR for the company’s own investment

Market trends and developments:

1. increasing standardization of ROFR clauses in venture capital agreements
2. adaptation to new forms of financing such as token offerings or crowdfunding
3. increased consideration of ROFR in international investment agreements
4. development of digital platforms for more efficient management and exercise of ROFR

Conclusion:

The right of first refusal is an important instrument in the startup and venture capital world that offers investors control and protection, but can also influence the flexibility and dynamics of startups. It requires careful consideration of the interests of all parties involved and forward-looking planning for various development scenarios of the company.

It is crucial for startups to understand the long-term impact of ROFR clauses on their financing and exit options and to balance these rights. Investors should view ROFR as a strategic tool that not only serves to protect themselves, but should also be in line with the company’s growth objectives.

In a constantly evolving startup ecosystem, ROFR remains a relevant but controversial topic. The challenge is to find a balance that ensures the protection of investor interests without compromising the agility and growth opportunities of the startup. A flexible and situation-appropriate handling of ROFR can help to create successful long-term investment relationships that are beneficial for all parties involved.