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 deadline to make an offer.
3. if the seller rejects the offer, he can offer the asset on the open market.
4. the seller may sell the asset to third parties on the same or better terms.

Importance for startups and investors:

For investors:
– Possibility of being informed about sales intentions at an early stage
– Opportunity to strategically increase your own stake in the company
– Potential price advantages through right of first offer

For startups:
– Greater flexibility compared to ROFR
– Possibility 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. time frame for the submission of a tender
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 intentions 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 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 in the disclosure of sales intentions
– Possible interaction with other contractual clauses (e.g. tag-along rights)

Strategic considerations for start-ups:

1. balancing investor protection and flexibility in the sale of 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 in the exercise of 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 forms of business 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 of sales intentions at an early stage 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 get 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 swift 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 creating balanced and flexible investment relationships. Careful structuring and application of ROFO clauses can help create a win-win situation for all parties involved and support the long-term growth and success of the startup.