A right of first refusal (ROFR) is a contract clause that gives a specific party the option to buy before the owner sells to someone else. For example, a renter might be given a ROFR to buy a property they're leasing that's going to be put on the market. A ROFR is also commonly used with startups to give certain parties the option to buy shares before the owner sells them to someone else.

Below, we'll discuss when a ROFR activates, where these clauses might appear in startup paperwork, and factors to weigh before you decide to include one in your documents.

Key takeaways

• A ROFR lets a specific party match an outside buyer's price and terms before a shareholder can sell their stake to someone else.

• ROFR and right of first offer (ROFO) run in opposite directions: a ROFO shifts negotiating power to the seller, and a ROFR shifts it to the right holder.

• Founders who are considering a ROFR clause must balance the control it gives over the cap table against the delays it adds to employee liquidity.

What is a right of first refusal?

A ROFR is a contract clause that gives a specific party (usually the company, its board, or certain investors) the option to buy shares before the owner sells them to someone else. The clause doesn't usually block a sale outright, and the ROFR holder might have to match an outside buyer's price and terms before the deal can close.

How does a ROFR work?

The specific windows and price terms shift from document to document, but many ROFR clauses follow the same sequence. A shareholder gets a bona fide bid from an outside buyer or, depending on how the clause is drafted, decides to transfer shares through a gift or an inheritance, which can also trigger the ROFR.

From there, the process often follows four steps:

• Notice: The seller sends notice to the ROFR holder, disclosing the buyer's identity, the price per share, and any other material terms of the deal.

• Exercise window: The ROFR holder has a fixed number of days, set when the clause was drafted, to decide whether to buy the shares on those same terms.

• Decision: If the holder exercises the right, they close on the same price and terms as the outside buyer. If they decline or the window lapses without a response, the seller can move ahead with the original sale.

• Closing deadline: Clauses typically give the seller a set period afterward to close with the outside buyer before the whole process has to restart.

Where does a ROFR appear in startup documents?

ROFR provisions can show up at several points in a company's paperwork, and each version tends to protect a slightly different interest.

Here are some places you might see a ROFR:

• Shareholder or stockholder agreements: These typically give the company and existing investors a ROFR over any shareholder's proposed transfer. This prevents unknown third parties from owning equity.

• Equity incentive plans: Stock option plans and restricted stock agreements might incorporate a company ROFR on shares employees exercise so departing employees can't sell freely on the open market.

• Investor term sheets: Term sheets for priced rounds sometimes pair a ROFR with pro rata rights. This gives existing investors a say in who joins the cap table in later transactions.

• Founder equity agreements: Vesting agreements and buy-sell provisions between co-founders frequently include a ROFR so a departing founder can't sell their stake to an outside party without giving the remaining founders a chance to buy it first.

What's the difference between a ROFR and ROFO?

With a ROFR, the seller negotiates a deal with an outside buyer first, then they must give the ROFR holder the option to match those terms before they close. The seller effectively sets the price by shopping the deal around.

With a ROFO, the seller must give the ROFO holder the option to buy before they sell to anyone else. This gives the ROFO holder the chance to make a bid first.

A ROFO tends to favour sellers, while a ROFR tends to favour the right holder. Startup documents could include both, depending on the bargaining dynamic between founders and investors at the time of financing.

How does a ROFR affect founders and company control?

A company-held ROFR is one tool founders have to keep unwanted parties off the cap table. It can reduce the chance that a disgruntled early employee or a departing co-founder will sell shares to a competitor, an activist investor, or anyone else willing to pay. The ROFR gives the company or the board, depending on how the clause is written, a chance to buy those shares back before ownership changes hands. That helps keep the cap table limited to people the company chose to bring on rather than whomever a departing shareholder happens to find.

ROFRs can have these drawbacks:

• Slower liquidity for employees: Even when the company ultimately declines to exercise the right, the notice period and waiting window still have to run. That slows down the transaction.

• Strained investor relationships: A company that routinely exercises ROFR to block investors from selling to each other can signal that the board wants tighter control over who holds equity than some investors might've expected going into the funding round.

• Concentrated control: A clause that gives the company first privilege at buybacks is different from one that hands the same right to one large investor. The second version can concentrate control in ways that outlast the reason it was originally negotiated.

Should your startup include a ROFR clause?

A ROFR makes the most sense when a company wants control over who's on its cap table and expects employee or founder share sales before a formal liquidity event. It matters less for companies that don't expect much secondary activity or where investors have enough other consent rights to block unwanted transfers on their own.

The trade-off comes down to speed vs. control. A ROFR adds a mandatory waiting period to an active transfer, which protects the ownership structure but slows down anyone who's trying to sell. Founders should weigh that against how much early liquidity is likely to matter to employees and how much risk they're willing to accept regarding an unknown third party receiving ownership.

Getting the notice periods, exercise windows, and matching terms language right at the draft stage can avoid a lot of disagreement later. Have a lawyer review the specific clause's language instead of relying on a template written for a different company's cap table.

How Stripe Atlas can help

Stripe Atlas handles everything you need to legally launch your company—incorporation, Employer Identification Number (EIN), equity setup, and tax filings—so you can fundraise, open a bank account, and start accepting payments in as little as two working days, from anywhere in the world.

Join 100,000+ startups incorporated using Atlas, including startups backed by top investors like Y Combinator, a16z, and General Catalyst.

Get started in minutes with Atlas

The application takes under 10 minutes. You'll choose your company structure, confirm your name is available, add up to four co-founders, set your equity split and e-sign. Then, Atlas takes it from there, including notifying co-founders to sign their documents electronically.

Banking and payments before your EIN arrives

Atlas files your EIN application automatically after incorporation. You don't have to wait. Atlas enables pre-EIN payments and banking so you can start accepting payments and making transactions right away. US founders with a Social Security number are typically eligible for expedited IRS processing.

Automatic 83(b) tax election filing

Atlas files your 83(b) election for you—US and non-US founders alike—with USPS Certified Mail and tracking to reduce personal income taxes. You'll get a signed 83(b) election and proof of filing directly in the Stripe Dashboard, with certified mail confirmation.

World-class company legal documents

Atlas provides all the legal documents you need to start running your company—drafted by Cooley, one of the world's leading venture capital law firms—and stores them directly in the Stripe Dashboard. These documents are designed to help you fundraise immediately and ensure your company is legally protected, covering aspects like ownership structure, equity distribution, and tax compliance.

US$2,500 in Stripe credits, plus US$50K+ in partner discounts

Atlas startups get US$2,500 in Stripe product credits for their first year, plus US$50,000+ in discounts on essential tools—Mercury, AWS, Carta, Xero, Perplexity, and more. Delaware registered agent service is also included free for your first year.

Learn more about how Atlas can help you set up your new business quickly and easily or get started today.