Weekly Update #188: It ain't over til it ain't ROFR-ed
It ain't over till it ain't ROFR'd: Why companies sometimes exercise their Right of First Refusal (ROFR)
If you've been an active investor on EquityZen's platform, you've probably heard us reference the Right of First Refusal, or ROFR (pronounced "row-fur"), before. As a refresher, it's a clause that gives a company (or some of its investors), the right to match the purchase price of a secondary transaction and buy the shares themselves.
I hate to brag, but we do have a pretty awesome FAQ: https://equityzen.com/faq/
Here's a procedural example of a company exercising their ROFR:
- EquityZen submits a Notice of Share Transfer to Startup ABC, communicating our intent to purchase 150,000 shares of Startup ABC Common Stock from an ex-employee at $10.00 per share, for a full consideration of $1.5 million (150,000 shares * $10/share).
- Startup ABC acknowledges receipt, and then has 30 days to match the bid, or otherwise waive their ROFR.
- After 25 days, Startup ABC communicates to EquityZen that it will indeed be exercising its ROFR and purchasing the 150,000 shares themselves.
So why might a company (or its investors) exercise their ROFR? Here are a few:
- Price. The company has cash in the coffers and thinks that the opportunity to purchase shares at a given price makes sense.
- Growing a position. A major investor may have gotten a smaller allocation in a primary round and is looking to get more shares.
- Defense. Companies can grow weary of having too many investors on their Cap Table. (Note: this is one of the reasons why EquityZen pools investors into a single entity when purchasing shares)
"Well Phil, that kind of stinks. What can we do to avoid the ROFR?"
There is some good news here. For one, the ROFR is not a common occurrence for EquityZen's transactions: less than 15% of EquityZen's transactions have been ROFR'd (roughly 1 in 7). Additionally, transactions that involve Preferred Stock are rarely subject to a ROFR.
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