A Right of First Refusal (ROFR) provision gives a startup the right to step into the shoes of a third-party buyer when a current stockholder wants to sell their shares. In other words, before the shares can be sold to an outside purchaser, the company has the option to buy the shares itself on the same terms. This Right of First Refusal is a common way for startups to keep tighter control over who ends up on the cap table. Where to place the ROFR, such as in an individual agreement with a shareholder, or in the bylaws, is a common question startups face.
Example: If an early employee wants to sell 10,000 shares to an outside buyer for $2.00 per share, a Right of First Refusal allows the company (and sometimes other permitted holders) to purchase those same shares at $2.00 per share instead. This is how a ROFR can prevent an unexpected third party from showing up on the cap table.
Structuring the Right of First Refusal
A Right of First Refusal can be implemented in a few common ways: it can live in individual stock purchase or equity grant agreements, it can be included in the company’s bylaws, or both (the “belt and suspenders” approach). In practice, many startups include a ROFR in each stock agreement so that the restriction clearly travels with the shares. Including a Right of First Refusal in the bylaws can also be convenient because you are not relying on every individual agreement to contain the same language.
Equity agreements only: ROFR appears in stock purchase agreements, option agreements, restricted stock agreements, etc.
Bylaws: ROFR appears in the bylaws and applies to covered transfers.
Both: ROFR appears in the bylaws and in each equity agreement for redundancy.
Also note that in a seed or venture round, investors may require a separate Right of First Refusal and co-sale agreement (or similar transfer restriction agreement) that gives the company and certain investors the right to purchase shares that a stockholder proposes to transfer.
Potential problem
A Right of First Refusal provision in the bylaws can cause issues if it is drafted too broadly. We have seen this when the ROFR applies to “all securities,” rather than only common stock. A blanket Right of First Refusal can unintentionally cover preferred stock, meaning investors’ shares would be subject to company buyback rights and transfer restrictions that they did not negotiate for. Investors typically do not want their preferred shares restricted this way, but this kind of Right of First Refusal provision can fall through the cracks during diligence.
Read the bylaws early: transfer restrictions are often buried and not top of mind during a fast fundraise.
Confirm what is covered: does the Right of First Refusal apply to “shares,” “common stock,” or “all securities” (including preferred)?
Check for exceptions: estate planning transfers, transfers to affiliates, and other customary carveouts should be clear.
Consider convertible rounds too: even if the investment is a note or SAFE, the investor will likely diligence the charter and bylaws.
Solution: carve out preferred stock
If you want the Right of First Refusal in your bylaws, a practical fix is to draft the Right of First Refusal so it applies only to common stock (or to other specifically defined securities), and explicitly excludes preferred stock. This can preserve the company’s intended Right of First Refusal protection while avoiding the need to amend and restate the bylaws later as part of a financing.
Define the covered securities: limit to common stock unless you have a specific reason to include more.
Add clear exemptions: estate planning, family trusts, and affiliate transfers are common.
Match your financing documents: confirm the bylaws do not conflict with any investor Right of First Refusal/co-sale agreement.
Make it easy to administer: specify notice mechanics, response deadlines, and how the purchase price is determined.
Ryan RobertsStartup Lawyer
Ryan Roberts is a startup lawyer at Roberts Zimmerman PLLC with more than two decades of experience advising startups and venture capital investors. He is the author of “Acceleration” and StartupLawyer.com.
