Here’s Everything You Need To Know About The Right Of First Refusal

What Does The Right Of First Refusal (ROFR) Mean In Startup Terms?

The Right of First Refusal (ROFR) is a contractual right that gives an investor the option to purchase additional shares in a startup before those shares are offered to third parties. For example, if an investor holds a ROFR for a startup, they have the right to purchase additional shares of the company before those shares are offered to other investors or the public.

In India, the right of first refusal can be found in various contracts and agreements, such as franchise agreements and lease agreements. It provides certain powers and rights to the parties involved, ensuring that they have the first opportunity to accept or decline an offer.

What Is The Right Of First Negotiation?

The right of first negotiation (ROFN) is a contractual provision that requires the grantor to negotiate with the holder of the right for a potential transaction before entering into negotiations or an agreement with a third party on the transaction.

A ROFN can be used to give an investor the first opportunity to negotiate the terms of a potential investment before the company negotiates with other investors or parties.

What Are The Disadvantages Of The Right Of First Refusal?

The right of first refusal can be both beneficial and detrimental, depending on the specific circumstances and the way it is implemented. For the entitled party, a right of first refusal can provide peace of mind and help prevent potential disputes over ownership. 

However, it can also limit the owner’s potential profits, as they are restricted from negotiating third-party offers before the holder of the rights. Additionally, overly vague or poorly negotiated rights of first refusal can lead to disputes and litigation.

The following are some disadvantages of the right of first refusal:

Limited Potential For Capital Raising: An ROFR can limit a startup’s ability to raise capital by restricting it from negotiating with other investors.

Potential For Disputes: Poorly negotiated or overly vague ROFR clauses can lead to disputes and litigation.

Binding Agreements: The right of first refusal legally binds both parties, which can create complications if the parties involved cannot reach an agreement or if one party breaches the terms of the agreement.

What Is The Difference Between ROFR And ROFN?

The main difference between the right of first refusal (ROFR) and the right of first negotiation (ROFN) lies in the level of involvement and control the holder of the right has in the negotiation process.

A ROFR gives the holder the option to enter into a transaction before the owner, while a ROFN requires the grantor to negotiate with the holder of the right for a potential transaction before entering into negotiations or an agreement with a third party.